## Nepal Financial Sector Stability Review — Preface & Executive Summary (1nplea2023003) ## Source details **Canonical URL:** [Nepal Financial Sector Stability Review — Preface & Executive Summary (1nplea2023003)](https://www.imf.org/-/media/files/publications/cr/2023/english/1nplea2023003.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1nplea2023003.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1nplea2023003.pdf.json) --- ### Mission, scope, and methodology - Mission conducted remotely and in-person between September 20–November 18, 2022; visited Kathmandu, Nepal during November 1–14, 2022. - Mission led by Mr. Tanai Khiaonarong (MCM) with team members from MCM and STA and local support from IMF Resident Representative Office in Kathmandu. - Two modules agreed during scoping (May 2022): - Financial stability module: banking supervision and regulation, stress testing, crisis management, payment systems, financial inclusion. - Financial sector statistics module: key data gaps hampering financial stability analysis and statistical reporting to IMF STA. - Diagnostic methodologies and standards used: Basel Core Principles; Basel Committee 2018 Stress Testing Principles; Key Attributes of Effective Resolution Regimes; Revised Core Principles for Effective Deposit Insurance; PFMI; Basel Committee guidance on financial inclusion. *Mission objective:* Strengthen identification, analysis, and mitigation of risks to financial stability in Nepal and propose a Technical Assistance Roadmap (TARM). --- ### Executive summary — key findings - Banking supervision and regulation - NRB has developed its supervisory approach; continued strengthening will improve banking sector resilience. - Regulations are largely rules-based and use limits/caps (examples: interest ceilings and fee caps). - Some regulatory conservatism exists (examples: low loan-to-value -LTV- and high risk-weighted assets -RWA-). - Use of limits/caps may impair banks’ strategic decision-making and effectiveness of other regulations. - Heightened supervisory focus on credit risk; recent guidance on working capital loans to address evergreening. - Onsite supervisory cycle: supervisors onsite on an annual basis. - Limited progress on several 2014 FSAP recommendations (e.g., absence of a framework for consolidated supervision). - Need for offsite analytical tools and risk specialization to support planned regulatory changes (examples: LCR, IFRS 9, new Working Capital Guidelines). - Stress testing - Micro stress tests of solvency and liquidity conducted since 2012, but current methodology is overly simplified. - Need to build top-down macro stress tests based on alternative macroeconomic scenarios, credit risk satellite models, and explicit projections of banks’ balance sheet and profit and loss items over a longer horizon. - Complement macro stress tests with interconnectedness/contagion analysis and additional risk monitoring tools. - Crisis management and resolution - NRB functions de facto as resolution authority with relatively strong powers for early intervention; recent legislative changes provided additional resolution tools. - New tools need further legal underpinnings and better alignment of laws and regulations. - NRB should introduce recovery planning requirements and start resolution planning. - Deposit guarantee scheme (DCGF) should be significantly strengthened to ensure rapid payouts and operationalize recently provided powers to fund resolution. - ELA policies and procedures need refinement; domestic coordination for crisis management requires significant improvement. - Payment systems - Modernization gained momentum: Payment and Settlement Act (PS Act) passed; RTGS implemented in 2019; instant payments and CBDC explorations underway. - Remaining gaps: legal certainty of finality and netting unclear; systemically important payment systems not formally identified; international risk management standards not adopted/applied; RTGS enhancements needed; cyber risk and BCM need improvements; protection required for e-money from insolvency of PSPs or settlement bank. - Financial inclusion - Access to formal financial services increased from 25 percent of adults in 2011 to 54 percent in 2021. - Nearly half remain excluded; women less likely to have an account than men; account usage is low. - MFIs and SACCOs important for low-income people, especially women; MFI sector consolidating; some MFIs struggle due to interest rate ceiling. - Some SACCOs exceed the size of smaller banks; risks are increasing in absence of effective supervision. - CIB operates separate platforms for banks and MFIs and excludes most SACCOs, creating blind spots. - Newly formed Financial Consumer Protection (FCP) division will be important to build trust and confidence. - Financial sector statistics - MFS cover central bank and ODCs (commercial banks, development banks, finance companies that accept deposits). - OFCs represent around 12 percent of total financial system assets and are not currently covered in MFS. - Compiling OFCs data in IMF SRFs prioritized; scope exists to include new FSIs and expand FSIs to NBFIs. --- ### Main recommendations (high-priority summary) - Banking supervision and regulation - Develop risk specialists in banking supervision (Time Frame: MT). - Develop analytical tools for offsite surveillance using SIS data (Time Frame: ST). - Assess liquidity regulations, supervisory processes, contingency funding plans, and undertake a quantitative impact study for LCR introduction (Time Frame: MT). - Assess credit risk supervision processes and regulations for problem loans; targeted review of Working Capital Guideline and restructured loans (Time Frame: ST). - Comprehensive review of capital management framework including capital definition, buffer regime, pillar 2, and SREP (Time Frame: MT). - Reconsider phasing-out directed lending programs where banks lack expertise in risk management (Time Frame: ST). - Stress testing - Revise micro stress testing methodology for more realistic projections (Time Frame: MT). - Build top-down macro stress testing framework for solvency with explicit macro scenarios and 3-year projections of banks’ balance sheets and P&L (Time Frame: MT). - Strengthen macro-financial and systemic risk surveillance and raise analytical quality of the Financial Stability Report (Time Frame: MT). - Crisis management - Introduce recovery planning requirements and start resolution planning (Time Frame: MT). - Operationalize resolution framework and align associated laws, by-laws, and regulations (Time Frame: ST). - Strengthen DCGF as a safety net (Time Frame: ST). - Improve inter-agency cooperation on crisis preparedness (Time Frame: MT). - Strengthen ELA framework to function as an instrument for solvent banks in exceptional cases (Time Frame: ST). - Payment systems - Strengthen legal framework and oversight to provide legal certainty (Time Frame: MT). - Identify and designate systemically important payment systems; adopt PFMI in regulations and apply to designated systems (Time Frame: ST). - Enhance RTGS, increase utilization, and fully automate intraday liquidity facility to achieve Delivery Versus Payment (Time Frame: LT). - Improve cyber and operational resilience of major payment systems, participants, and NRB (Time Frame: MT). - Consider activity-based risk-focused payment legislation, protect e-money funds, and assess CBDC issuance (Time Frame: LT). - Financial inclusion - Implement formal information sharing agreement with cooperative authorities for timely SACCO data (Time Frame: MT). - Work with MoLCP to develop coordinated supervision program for SACCOs (Time Frame: MT). - Replace required interest rate ceiling for Class D MFIs with a base rate plus premium used for banks, supported by risk-based supervisory procedures and experienced staff (Time Frame: ST). - Develop and implement a robust FCP function, including dedicated law, subordinate regulations, supervisory tools and resources (Time Frame: LT). - Time frame definitions: - Short-Term (ST): < 6 months - Medium Term (MT): around 18 months - Long Term (LT): around 30 months *IMF | Technical Report – Nepal Financial Sector Stability Review | Preface & Executive Summary.* --- ### Introduction — financial system overview and macrofinancial vulnerabilities ### Scope of work and timing - FSSR mission conducted September 20–November 18, 2022; scoping with NRB in May 2022. - Topics covered: banking supervision and regulation, stress testing, crisis management, payment systems, financial inclusion, financial sector statistics. ### Financial system structure (as of July 2022 and related time series) - Domestic private sector credit: 88 percent of GDP (as of 2020). - BFIs represent approximately 80 percent of total financial system assets. - Institutional counts as of July 2022: - 26 commercial banks (Class A) - 17 development banks (Class B) - 17 finance companies (Class C) - 64 MFIs (Class D) - 1 Infrastructure Development Bank - Other financial institutions (as of July 2022): 19 life insurance companies; 19 non-life insurance companies; 2 reinsurance companies; Employees Provident Fund (EPF); Citizen Investment Trust (CIT); Social Security Fund (SSC); Hydroelectricity Investment and Development Company Ltd. (HIDCL); 10 hire purchase companies; postal saving bank. - Cooperatives: estimated number 30,879, including 14,484 SACCOs. - Selected time series (number of institutions 2018–2022) - Commercial Banks (class A): 2018: 28, 2019: 28, 2020: 27, 2021: 27, 2022: 26 - Development Banks (class B): 2018: 33, 2019: 29, 2020: 20, 2021: 18, 2022: 17 - Finance Companies (class C): 2018: 25, 2019: 23, 2020: 22, 2021: 17, 2022: 17 - Microfinance Financial Institutions (class D): 2018: 65, 2019: 90, 2020: 85, 2021: 70, 2022: 65 - Sub-total (selected BFIs): 2018: 152, 2019: 171, 2020: 155, 2021: 134, 2022: 127 ### Macrofinancial vulnerabilities (2021–2022 indicators) - External sector pressures (2022): - Imports increased to 40 percent of GDP, compared to 36 percent a year ago. - Current account deficit widened from 7.8 percent of GDP to 12.8 percent of GDP from 2021–2022. - Declines in foreign exchange reserves were observed. - Remittances and tourism disruption contributed to external risks. - Monetary policy and banking funding: - NRB increased the bank rate, statutory liquidity ratio, and cash reserve ratio as contractionary policy. - Two months into fiscal year 2022/23 total BFI deposits decreased by 0.9 percent. - Total credit to deposit ratio reached over 90 percent as of 2022; banks required to limit lending to 90 percent of deposits and other stable sources of funding. - Lending rates increased from 8.5 percent in August 2020 to 12.1 percent in September 2022. - Asset quality and provisioning (as of July 2022): - NPL ratio for class A, B and C banks was 1.31 percent (compared to 1.48 percent in mid-July 2021). - Loans and advances by collateral type: Fixed Assets 75.1 percent; Current Assets 12.3 percent; Others 6.7 percent; Against Guarantee 4.1 percent; Fixed Deposit Receipts 1.4 percent; Against security of Bill 0.4 percent. - Loans and advances by type of financial institutions: Commercial Banks 75 percent; MFIs 8 percent; Development Banks 8 percent; Cooperatives 7 percent; Finance Companies 2 percent. - Capital market and funding constraints (2021/22) - NEPSE fully automated in 2021; daily market turnover nearly 3.8 percent of market capitalization. - Trading concentrated: 83.5 percent of market traded value represented by a handful of banks and financial institutions. - As of 2021/22, 30 percent of total market capitalization consists of the largest ten companies. - Corporate paper and bond markets largely absent; mutual fund issuance progressing; government securities not actively traded. --- ### Capital framework, asset quality, and provisioning (selected banking findings) ### Capital framework and supervisory metrics - All Class A banks meet the minimum capital ratio (MCR) of 8.5 percent. - A capital conservation buffer of 2.5 percent is applied in addition to the MCR (effectively raising the MCR to 11.0 percent). - NRB plans to implement a countercyclical buffer in 2023. - Banks required to meet a minimum leverage ratio of 4 percent. - RWAs composition: - Credit risk is approximately 93 percent of system RWAs. - Operational risk ranges between 3–6 percent of RWAs. - Market risk is typically 1 percent or below. - Supervisory Review and Evaluation Process (SREP) undertaken annually; adjustments to RWAs applied if deficiencies identified. ### Asset quality and provisioning - Industry NPL ratio decreased to 1.20 percent in mid-July 2022 as compared to 1.41 percent in mid-July 2021. - NRB increased provisioning for ‘Pass’ loans from 1 percent to 1.3 percent. - Transition to IFRS9 planned for 2023/24; transition will require expertise estimating PD and LGD and additional systems, data, and statistical modelling capacity. - Onsite examinations focus strongly on loan classification and provisioning; NRB requires adjustments to loan classifications and incorporates asset quality outcomes into the SREP. - Recommendation: comprehensive review of loan classifications, treatment of restructured loans, and loan loss methodology alongside IFRS9 transition. ### Supervisory gaps - Absence of explicit consolidated supervision framework constrains NRB powers. - Need to revise regulations to include consolidated supervision, update reporting requirements, supervisory manuals, and staff training. - NRB HR policy rotates staff periodically; risk of losing supervision expertise—recommend development of risk specialists for credit risk, liquidity, IT, and provisioning. --- ### Stress testing — diagnostics, shortcomings, and roadmap ### Current practice and limitations - NRB conducts simple micro solvency and liquidity stress tests quarterly since 2012; MFIs are not stress tested. - Exercise comprises about 30 mostly single-factor prescribed scenarios. - Micro stress tests shortcomings: 1. Too many credit risk scenarios calibrated without clear ordering; no data enabling comparison of assumed migration rates with observed migration rates. 2. Solvency stress tests lack an explicit horizon; pre-provision income not taken into account as a first line of defense. 3. Interest rate shock impact calculation is not realistic: borrower defaults resulting from rate increases are not captured. 4. No haircut assumed for bonds and bills in liquid assets despite NRB marginal lending facility applying a 10 percent haircut; funding shocks lack differentiation by funding type. - Additional gaps: - There are no macro (top-down) solvency or liquidity stress tests conducted at the NRB. - No detailed intra-financial sector interconnectedness analyses and domino-type contagion simulations. - NRB has a small financial stability unit but lacks systematic and regular system-wide monitoring and forward-looking Financial Stability Report projections. ### Micro stress testing recommendations (methodology and scope) - Revise micro stress testing to be projection-oriented with a 1-year horizon and a limited number of combined scenarios (e.g., 3 to 5 ordered by stress level). - Define credit risk shocks using full migration matrices calibrated to observed migration rates; banks to report recent own migration rates. - Make net interest income impact calculation realistic: reflect base rate mechanism, risk premia, lags, and reduced interest-bearing assets from new NPLs. - Project P&L items beyond provisions and NII: include non-interest income and operating expenses with preset guidance. - Calculate end-horizon RWAs consistently with NRB rules; assign elevated risk weights (150 percent for real-estate loans and other loans) to non-performing exposures net of provisions. - Use micro stress tests to calibrate Pillar 2 additional capital charges. - Improve liquidity micro stress tests: add haircuts on government bills and bonds; explicit time horizon for deposit withdrawal scenarios; differentiate deposit types and other funding sources; include off-balance sheet shocks. - Include MFIs in micro stress tests on a proportionate basis using a 1-year projection and simplified templates, starting with largest MFIs. ### Top-down macro stress testing and interconnectedness recommendations - Develop a top-down macro solvency stress test: - State-of-the-art solvency framework based on alternative macroeconomic scenarios, credit risk satellite models, explicit assumptions about pre-provision income, and consistent projection of banks’ balance sheets and P&L ideally over a 3-year horizon. - Include all supervised banks and financial institutions including MFIs. - Involve NRB Research Department to calibrate macroeconomic scenarios and estimate satellite credit risk models. - Leverage IFRS 9 implementation (fiscal year 2024/25) to collect PD and LGD time series by loan category to model PDs and LGDs as functions of macro-financial variables. - Include an interconnectedness/contagion block starting with interbank exposures and progressively adding non-bank financial institutions. - Develop macro liquidity stress test after LCR implementation using granular LCR-reported exposure and cash flow data. ### Institutional strengthening - Strengthen role, staffing and capacity of the financial stability unit to carry out regular monitoring, quarterly internal reporting, and produce forward-looking Financial Stability Report content. --- ### Crisis management, resolution, and safety net ### Baseline diagnostics and legal gaps - Recent legislative amendments broaden resolution toolkit, but: - Lack of sufficiently detailed operational plans for resolution. - Need for stronger alignment across laws, by-laws, and regulations (e.g., liquidation triggers and processes). - No resolution simulation exercise undertaken. - Laws do not assign a clear mandate to NRB as resolution authority; gaps include no explicit group resolution powers, no explicit powers for bail-in, absence of NCWO safeguards, uncertain creditor hierarchy, and missing legal protection for NRB and agents. - NRB has strong early intervention powers but procedural requirements can limit effectiveness (e.g., hearings before placing an official or 30-day notice for reducing capital). - Financial sector safety net underdeveloped: - DCGF provides deposit insurance and credit guarantee services; recent regulation provides additional functions but framework largely underdeveloped and inoperative. - ELA policies and procedures need refinement. ### Past failures and supervisory approach - Nepal experienced two failures of licensed financial institutions in the last ten years (contained to category ‘C’ banks). - 12 licensed financial institutions declared problematic (including 10 category ‘C’ banks and 2 category ‘B’ banks), most recovered. - Only 1 bank failure led to deposit payouts by the DCGF. - NRB encouraged consolidation and mergers via moratoriums and moral suasion; problematic institutions kept operating while NRB sought new investors. ### Recovery, resolution, and operational recommendations - Insert tangible resolution objectives and principles into NRB Act, including: - maintaining continuity of critical functions for resolving systemically important banks; - public support as last resort; - principle of private loss absorption and the “lesser cost than liquidation” test. - Strengthen risk assessment, early intervention, and PCA framework with clear escalation processes and time-limited temporary administrator mandates (preferably expiring within six months). - Establish recovery planning requirements for banks (initially systemically relevant banks), with triggers and idiosyncratic/systemic scenario coverage. - Develop resolution plans for larger institutions and run resolvability assessments iteratively. - Streamline legal coverage for bridge bank and P&A tools; operationalize resolution manuals for all tools; consider bad-asset separation and special asset management company options. - Introduce single creditors’ hierarchy and NCWO principle in future legislative amendments; include explicit pari passu provisions. - ELA improvements: - Provide ELA only to solvent institutions expected to remain adequately capitalized. - Incorporate reliable solvency, viability and capital assessment processes into ELA procedures; separate assessment and board advice functions. - ELA to be provided at a penalty rate, preferably as a margin above the main lending rate. - Consider expanding collateral list for ELA. - Consider allowing banks in resolution to be eligible for ELA when forward-looking solvency criteria are met. - Deposit insurance and DCGF: - Clarify modalities for DCGF use in funding P&A; clarify deposit coverage and metadata (coverage limit NPR 500,000 referenced). - Automate eligibility assessment and payout processes (Single Customer View files) to enable timely payouts. - Consider separating deposit guarantee from credit guarantee functions. ### Crisis preparedness and interagency coordination - Formalize Crisis Committee (CC) structure and establish a subcommittee focused solely on systemic crises. - Strengthen NRB–MOF coordination; establish a Memorandum of Understanding between NRB and MOF to set out responsibilities in responding to banking distress or failure. - Reinstitute a Problem Bank Resolution Unit at NRB as a small cross-departmental operational nucleus. - Enshrine legal protection for resolution actions in NRB Act to indemnify officials and agents acting in good faith within conferred powers. --- ### Payment systems — modernization, gaps, and recommendations ### Baseline diagnostics and institutional setup - Legal basis: Payment and Settlement (PS) Act 2019; PS Bylaw 2020; Payment Systems Inspection and Supervision Bylaw 2021; Licensing Policy for Payment Related Institutions 2016. - RTGS implemented in 2019. - Retail payments: connectIPS, IPS, Mobile Banking, Internet Banking, Wallets, QR Code; NCHL operates check clearing and IPS. - NRB is overseer, operator, and catalyst; PSD supervises 37 PSOs and PSPs but PSD understaffed with 5 unfilled positions. - NRB rotation policy rotates staff every 2–3 years (except IT Department), risking continuity. - NRB is a 10 percent shareholder in NCHL and its Executive Director (ED, Banking Department) chairs NCHL—potential conflict of interest. ### PFMI adoption and RTGS utilization - NRB has not formally identified and designated systemically important payment systems; intends to develop designation framework by fiscal year ending July 2023 and intends to designate RTGS, ECC, and connectIPS. - No PFMI formal adoption; no self-assessments or published Disclosure Frameworks for payment systems. - RTGS gaps: - RTGS does not support fully automated Intraday Liquidity Facilities (ILF) due to lack of dematerialized government securities and collateral management systems. - RTGS not fully utilized; high-value checks and GL transfers still used for interbank settlement. - RTGS settles NPR, USD, EUR, GBP, and JPY among domestic BFIs only; foreign currency settlement rules unclear. ### Cyber, operational resilience, and BCM - NRB issues IT Security directives; latest directive 2022 contains cyber security elements but lacks comprehensive cyber resilience specifics (e.g., 2-hour RTO, cyber testing). - CISO appointed July 2022 without a dedicated team. - Cyber incidents increasing (successful attacks on a bank’s SWIFT system and a payment switch). - RTGS DR arrangements exist but RTGS has not conducted drills; BCM framework expected by fiscal year ending July 2023. - Physical security weaknesses observed (IT asset operating in open annex building). ### E-money, PSPs, and CBDC - 27 PSP licenses issued: 25 e-money/domestic money transfer PSPs; 2 perform card payment functions. - Licensing regime limited to e-money and domestic money transfer; merchant acquisition and payment aggregator activities not explicitly provided for. - Safeguarding requirements: segregation of customer funds, holding with a settlement bank, daily reconciliation; NRB limits PSPs to holding float with only one bank (concentration risk). - NRB issued CBDC concept paper for public consultation August 2022; policy goals: better access to payments, resilience, reduced cash handling costs. ### Payment systems — main recommendations (selected) - Legal and oversight - Review legal framework to address finality, irrevocability, zero-hour rules, and enforceability of netting; adopt PFMI-consistent designation framework and formally apply PFMI to designated systems. - Publish English versions of key laws, regulations, and directives. - RTGS and utilization - Increase RTGS utilization; consider mandating high-value payments be settled through RTGS instead of GL or checks. - Expedite dematerialization of government securities and complete DOMS to enable full automation of ILF and Delivery-vs-Payment integration. - Enhance RTGS Rules to describe foreign currency settlement, queuing, gridlock resolution, liquidity facilities, and operational timings. - Operational resilience and cybersecurity - Align cyber resilience guidelines with CPMI-IOSCO Guidance on Cyber Resilience for FMI and extend to supervised entities. - Establish a dedicated team reporting to the CISO. - Review physical security and remediate vulnerabilities. - Build IT risk supervision capacity by hiring/training IT staff experienced in IT risk management and certified in IT Audit. - Adopt CPMI Wholesale Payment Fraud End-point Security elements and consider a SWIFT CSP-like security attestation for RTGS participants. - Develop and test RTGS BCP with a 2-hour RTO; test annually; consider alternate non-similar settlement system. - E-money and emerging payments - Review licensing and regulatory regime to be more activity-based and risk-focused. - Review safeguards to protect float against insolvency of e-money issuer or settlement bank; consider trust accounts, insurance, bank guarantees, multiple settlement banks. - Make a fully informed decision on CBDC, incorporating public policy objectives and financial stability implications. --- ### Financial inclusion, MFIs, SACCOs, CIB, and FCP ### Key inclusion metrics and observations - Access to formal financial services increased from 25 percent of adults in 2011 to 54 percent in 2021 (World Bank). - Nearly half of adults remain excluded; women less likely to have an account than men; account usage low with many dormant accounts. - Digital financial services expanding: e-money, QR code payments, digital credit; 27 non-bank PSPs though only a few active; four e-wallet providers with largest market share 56 percent; around 13,000 agents. ### Microfinance Institutions (MFIs) - MFI sector: 64 providers (Class D); MFIs account for about 8 percent of total loans of all financial institutions involved in lending. - Funding: investments and borrowings from other BFIs and voluntary savings from members. - Regime: lending rates capped at 15 percent and service charges at 1.5 percent. - Some MFIs face negative interest margins (lend at 15 percent while borrowing at 17 or 18 percent). - Supervision: compliance-based; inspections lack microfinance subject matter expertise due to staff rotations. - Recommendations: - Replace MFI interest rate ceiling with base rate plus premium (Time Frame: ST). - Complement new regime with disclosure of key terms, clear microcredit definitions, and market surveillance. - Adopt proportionate, risk-based inspection procedures with microfinance experts participating in inspections. - Articulate a formal vision and strategy for the microfinance sector. ### Savings and Credit Cooperatives (SACCOs) - Estimated 14,484 SACCOs; many small and local; some have total deposits exceeding Class B and C banks. - SACCOs largely unsupervised; signs of governance issues, insider abuse, over-lending, liquidity constraints. - Only a few SACCOs participate in CIB; lack of data creates systemic risk blind spots. - SACCOs expressed strong interest in NRB supervision or other competent authority oversight. - Recommendations: - NRB to work with MoLCP to develop coordinated supervision program for SACCOs, targeted at largest/systemically important SACCOs (Time Frame: MT). - Formalize data sharing arrangements with cooperative authorities under a written agreement (Time Frame: MT). - Provide TA for development of the regime and consider supporting a second-tier cooperative to assist supervision. ### Credit Information Bureau (CIB) and over-indebtedness - CIB platform used by 137 banks and financial institutions; owned by BFIs (90 percent) and NRB (10 percent). - MFIs use a separate platform; limited SACCO participation undermines comprehensiveness. - Public blacklist on CIB website contains thousands of names and is publicly accessible—privacy concern. - Recommendations: - Merge MFI and bank credit information on CIB platform and incorporate SACCO data gradually. - Remove public access to the blacklist on the CIB website. - Review privacy rules to protect customer privacy. ### Financial Consumer Protection (FCP) - NRB has a Financial Inclusion and Consumer Protection Division staffed with six people, three assigned to FCP. - Current FCP functions limited to grievance response and financial literacy. - Recommendations: - Develop comprehensive FCP function including: draft dedicated FCP law and subordinate regulations; develop supervisory tools (manuals, onsite/offsite procedures, enforcement standards); build capacity via TA (Time Frame: LT). --- ### Financial sector statistics — FSIs, MFS, BSA, and TA priorities ### Financial Soundness Indicators (FSIs) — coverage and key values (2021Q2–2022Q2) - NRB reports 13 core and 7 additional FSIs for DTs; two additional FSIs for OFCs; one FSI for HHs and two FSIs for real estate markets; reported quarterly. - Selected core FSI values (2021Q2, 2021Q3, 2021Q4, 2022Q1, 2022Q2): - Regulatory capital to risk-weighted assets: 14.2, 13.4, 13.3, 13.5, 13.5 - Tier 1 capital to risk-weighted assets: 10.9, 10.4, 10.4, 10.6, 10.7 - Nonperforming loans net of provisions to capital: 2.6, 2.2, 2.1, 2.7, 2.3 - Tier 1 capital to assets: 9.0, 9.0, 9.0, 9.0, 9.2 - Nonperforming loans to total gross loans: 1.4, 1.2, 1.2, 1.3, 1.2 - Provisions to nonperforming loans: 68.0, 70.6, 71.4, 66.8, 68.3 - Return on assets: 1.9, 1.6, 1.6, 1.6, 1.8 - Return on equity: 12.5, 11.0, 11.3, 11.1, 12.7 - Interest margin to gross income: 71.0, 67.9, 70.5, 72.6, 75.9 - Noninterest expenses to gross income: 44.1, 46.4, 46.5, 46.6, 46.4 - Liquid assets to total assets: 22.2, 19.6, 18.7, 19.2, 22.1 - Liquid assets to short-term liabilities: 32.5, 29.7, 25.5, 26.7, 43.6 - Net open position in foreign exchange to capital: 0.2, 0.9, 0.7, 0.4, 0.5 - Additional FSIs: - Personnel expenses to noninterest expenses: 61.2, 64.3, 62.1, 60.5, 59.9 - Spread between highest and lowest interbank rates (base points): 115.0, 7.0, 24.0, 50.0, 5.0 - Customer deposits to total (non-interbank) loans: 93.3, 87.9, 87.3, 87.1, 91.3 - Foreign-currency-denominated loans to total loans: 3.8, 3.7, 2.5, 1.1, 1.0 - OFCs' assets to total financial system assets: 17.9, 17.8, 17.6, 17.6, 18.2 - OFCs' assets to GDP: 28.4, 29.0, 29.3, 27.3, 28.1 - Residential real estate loans to total gross loans: 7.6, 7.4, 7.8, 7.6, 7.8 - Commercial real estate loans to total gross loans: 3.1, 3.1, 3.1, 3.1, 3.4 - Household debt to GDP: 26.2, 27.5, 28.8, 27.0, 26.35 ### Monetary and Financial Statistics (MFS) — coverage gaps and priorities - NRB reports monthly SRFs: 1SR for the central bank, 2SR for ODCs; broadly aligned with MFSMCG. - Coverage gaps: - SACCOs and MFIs that accept deposits together account for close to 10 percent of financial sector assets; MFIs supplemental balance sheets published but not included in SRF-2SR reported to STA. - OFCs represent around 12 percent of total financial system assets and NRB does not yet report OFCs data to STA. - Planned actions: - TA mission planned in FY2023 to assist NRB compile SRF 4SR for OFCs and map OFC data to SRFs. - Recommendation to formalize data-sharing agreement between NRB, Department of Cooperatives, and NCBL to obtain aggregated SACCO balance sheet data and include MFIs in reporting when they start reporting in NRB’s new system. ### Balance Sheet Approach (BSA) and data limitations - BSA uses SRFs, IIP, and GFS as main inputs. - IIP limitations: lack of breakdowns by sector and currency; BSA assumptions used where data missing. - GFS limitations: stock positions presented at face value and difficult to reconcile. - Recommendation: expand MFS coverage (OFCs, SACCOs, MFIs), improve IIP currency breakdowns, reconcile GFS with other macro datasets, and collect NFC and HH positions as needed. ### Financial Access Survey (FAS) - NRB reported to FAS since 2009 and regularly for 2004–2021. - Nepal does not yet report gender-disaggregated data on use of financial services; NRB to coordinate with IMF to start reporting gender-disaggregated indicators. ### TA priorities in financial sector statistics (selected) - Report FSIs for OFCs as planned. - Expand MFS coverage to include OFCs and SACCOs via SRF 4SR and improved data-sharing arrangements. - Map MFIs that accept deposits to SRF-2SR and include them in reporting. - Medium- to long-term TA for implementing 2019 FSIs Guide recommendations, expanding FSIs for DTs, OFCs, NFCs, and HHs, and compiling concentration and distribution measures (CDMs). --- *IMF | Technical Report – Nepal Financial Sector Stability Review (1nplea2023003).* ### Preface ................................................................................................................ ### Preface ### Mission and team - Mission conducted remotely and in-person between September 20–November 18, 2022; visited Kathmandu, Nepal during November 1–14, 2022. - Mission led by Mr. Tanai Khiaonarong (Monetary and Capital Markets Department, MCM). - Team members: Ms. Bidisha Das (Statistics Department, STA), Chloe Zhang (MCM), Ms. Laura Newbury, Adam Gersl, Terry Goh, Peter Lohmus, Christopher Wilson (all MCM short-term experts). - Mr. Miguel Savastano, Deputy Director (MCM), joined for the closing meeting. - Local support: Ms. Teresa Daban Sanchez (Resident Representative) and Ms. Sudha Dulal (Local Economist), IMF Resident Representative Office in Kathmandu. ### Meetings and stakeholders - Met with Mr. Maha Prasad Adhikari (Governor, Nepal Rastra Bank - NRB) and Mr. Ramesh Kumar Hamal (Executive Chairman, Securities Board of Nepal - SEBON). - Met NRB senior management and staff, and representatives from: Ministry of Finance (MOF), Deposit and Credit Guarantee Fund (DCGF), Credit Information Bureau (CIB), Department of Co-operatives (DoC), Nepal Federation of Savings & Credit Cooperative Unions Ltd, Nepal Microfinance Banker’s Association, Nepal Bankers’ Association. - Engaged with senior executives from public and private sector financial institutions and companies; liaised with the World Bank. ### Scope of work agreed during scoping (May 2022) - Two modules: - Financial stability module: banking supervision and regulation, stress testing, crisis management, payment systems, financial inclusion. - Financial sector statistics module: key data gaps hampering financial stability analysis and statistical reporting to IMF STA. ### Acknowledgement - Mission thanks NRB staff for collaboration, productive discussions, and hospitality. ### Executive Summary — Diagnostic scope and approach - Conducted diagnostic review of financial sector oversight capacity and proposed a Technical Assistance Roadmap (TARM). - Emphasis on strengthening identification, analysis, and mitigation of risks to financial stability in Nepal. ### Key findings — Banking supervision and regulation - NRB has developed its supervisory approach; continued strengthening will improve banking sector resilience. - Regulations are largely rules-based and use limits/caps (examples: interest ceilings and fee caps). - Some regulatory conservatism exists (examples: low loan-to-value -LTV- and high risk-weighted assets -RWA-). - Use of limits/caps may impair banks’ strategic decision-making and the effectiveness of other regulations. - Heightened supervisory focus on credit risk; recent guidance issued on working capital loans to address evergreening. - Onsite supervisory cycle: supervisors onsite on an annual basis. - Considerable effort on an automated system for offsite data, but limited progress on several 2014 FSAP recommendations (e.g., absence of a framework for consolidated supervision). - Need for development of offsite analytical tools and risk specialization in banking supervision to support planned regulatory changes (examples: liquidity coverage ratio (LCR), IFRS 9, new Working Capital Guidelines). ### Key findings — Stress testing - Micro stress tests of solvency and liquidity conducted since 2012, but current methodology is overly simplified. - Micro stress tests helped establish a stress testing culture but require improvements to provide plausible results for supervisory use. - Need to build top-down macro stress tests based on alternative macroeconomic scenarios, credit risk satellite models, and explicit projections of banks’ balance sheet and profit and loss items over a longer horizon. - Complement macro stress tests with analyses of interconnectedness and contagion risk and additional risk monitoring tools to enhance macro-financial surveillance and the annual Financial Stability Report. ### Key findings — Crisis management and resolution - NRB functions de facto as resolution authority with relatively strong powers for early intervention; recent legislative changes provided additional resolution tools. - New tools need further legal underpinnings and better alignment of laws and regulations. - NRB should introduce recovery planning requirements and start resolution planning. - Deposit guarantee scheme should be significantly strengthened to ensure rapid payouts and operationalize its recently provided powers to fund resolution. - ELA (Emergency Liquidity Assistance) policies and procedures need refinement, including increased supervisory reach and intrusion for banks receiving ELA. - Domestic coordination for crisis management requires significant improvement. ### Key findings — Payment systems - Modernization efforts have gained momentum: Payment and Settlement Act (PS Act) passed; RTGS implemented in 2019; developments in instant payments and CBDC explorations. - Remaining gaps: - Legal certainty of finality and netting for payment systems unclear; oversight needs strengthening. - Systemically important payment systems not formally identified and designated; international risk management standards not adopted/applied. - RTGS needs enhancement to support growing banking and capital market sectors. - Cyber risk and business continuity management (BCM) need improvements. - Protection required for e-money from insolvency of PSPs or settlement bank. ### Key findings — Financial inclusion - Access to formal financial services increased from 25 percent of adults in 2011 to 54 percent in 2021. - Nearly half of Nepalese remain excluded; women less likely to have an account than men; account usage is low. - MFIs and SACCOs are important providers for low-income people, especially women. - MFI sector consolidating; some MFIs struggle due to the current interest rate ceiling. - Some SACCOs exceed the size of smaller banks; risks are increasing in absence of effective supervision (issue noted in 2014 FSAP). - CIB provides data for banks and MFIs on separate platforms and excludes most SACCOs, creating blind spots in credit risk and over-indebtedness monitoring. - Newly formed Financial Consumer Protection (FCP) division will be important to build trust and confidence in formal financial services. ### Key findings — Financial sector statistics - MFS currently cover: central bank and ODCs (commercial banks, development banks, finance companies that accept deposits). - OFCs sector represents around 12 percent of total financial system assets and is not currently covered in MFS. - Compiling OFCs data in IMF’s SRFs should be a priority for NRB to support a more complete Balance Sheet Analysis. - Core and additional FSIs for deposit-takers are compiled and disseminated quarterly by NRB, but scope exists to include new indicators for DTs and expand FSIs to NBFIs. - Collaboration between NRB and other financial regulators is key to improving financial sector statistics. ### Main recommendations (high priority items summarized from Table 1) - Banking Supervision and Regulation - Develop risk specialists in banking supervision (Time Frame: MT). - Develop analytical tools for offsite surveillance using SIS data (Time Frame: ST). - Assess liquidity regulations, supervisory processes, contingency funding plans, and undertake a quantitative impact study for LCR introduction (Time Frame: MT). - Assess credit risk supervision processes and regulations for problem loans; targeted review of Working Capital Guideline and restructured loans (Time Frame: ST). - Comprehensive review of capital management framework including definition of capital, buffer regime, pillar 2, and supervisory review process (Time Frame: MT). - Reconsider phasing-out directed lending programs where banks lack expertise in risk management (Time Frame: ST). - Stress Testing - Revise existing micro stress testing of solvency and liquidity for more realistic projections (Time Frame: MT). - Build top-down macro stress testing framework for solvency with explicit macro scenarios and 3-year projections of banks’ balance sheets and P&L (Time Frame: MT). - Strengthen regular macro-financial and systemic risk surveillance and raise analytical quality of the annual Financial Stability Report (Time Frame: MT). - Crisis Management - Introduce recovery planning requirements and start resolution planning (Time Frame: MT). - Operationalize resolution framework and align associated laws, by-laws, and regulations (Time Frame: ST). - Strengthen the role of the DCGF as a safety net (Time Frame: ST). - Improve inter-agency cooperation on crisis preparedness (Time Frame: MT). - Strengthen ELA framework to function as an instrument for solvent banks in exceptional cases (Time Frame: ST). - Payment Systems - Strengthen legal framework and oversight to provide legal certainty and sound payment oversight (Time Frame: MT). - Identify and designate systemically important payment systems; adopt PFMI in regulations and apply to designated systems (Time Frame: ST). - Enhance RTGS, increase utilization, and fully automate intraday liquidity facility to achieve Delivery Versus Payment (Time Frame: LT). - Improve cyber and operational resilience of major payment systems, participants, and NRB (Time Frame: MT). - Consider activity-based risk-focused payment legislation, protect e-money funds, and assess CBDC issuance (Time Frame: LT). - Financial Inclusion - Implement formal information sharing agreement with cooperative authorities for timely SACCO data (Time Frame: MT). - Work with MoLCP to develop coordinated supervision program for SACCOs to minimize risks to the wider financial sector (Time Frame: MT). - Replace required interest rate ceiling for Class D MFIs with a base rate plus premium used for banks, supported by risk-based supervisory procedures and experienced staff (Time Frame: ST). - Develop and implement a robust FCP function, including dedicated law, subordinate regulations, supervisory tools and resources (Time Frame: LT). - Time frame definitions from Table 1: - Short-Term (ST): < 6 months - Medium Term (MT): around 18 months - Long Term (LT): around 30 months *IMF | Technical Report – Nepal Financial Sector Stability Review | Preface & Executive Summary.* ### Introduction ### Introduction ### A. SCOPE OF WORK - The report was prepared as part of the FSSR mission conducted remotely and in-person between September 20–November 18, 2022. - Scoping discussions were held with the NRB remotely in May 2022. - The FSSR mission conducted a broad diagnostic of key segments of the financial system and proposed a TARM to support authorities in addressing gaps and vulnerabilities in the Nepalese financial system. - Topics covered: banking supervision and regulation, stress testing, crisis management, payment systems, financial inclusion, and financial sector statistics. - Methodologies and standards used for the diagnostic: - Basel Core Principles for banks (bank supervision evaluation). - Basel Committee for Banking Supervision 2018 Stress Testing Principles and best international practices (stress testing capacity). - Key Attributes of Effective Resolution Regimes (KA) and the Revised Core Principles for Effective Deposit Insurance (financial crisis management frameworks). - Principles for Financial Market Infrastructures (PFMI) (payment systems). - Basel Committee Guidance on application of Core Principles to institutions relevant to financial inclusion; World Bank/Committee on Payments and Market Infrastructures Payments Aspects of Financial Inclusion; World Bank Good Practices for FCP (financial inclusion). ### B. OVERVIEW OF THE FINANCIAL SYSTEM - As of 2020, domestic private sector credit stood at 88 percent of GDP. - Since 2021–2022, the Nepalese economy and financial sector were in a recovery phase from the COVID-19 pandemic. - BFIs represent approximately 80 percent of total financial system assets in Nepal. - As of July 2022, the institutional structure included: - 26 commercial banks (Class A) - 17 development banks (Class B) - 17 finance companies (Class C) - 64 MFIs (Class D) - 1 Infrastructure Development Bank - Other financial institutions (as of July 2022) include: - 19 life insurance companies - 19 non-life insurance companies - 2 reinsurance companies - Employees Provident Fund (EPF) - Citizen Investment Trust (CIT) - Social Security Fund (SSC) - Hydroelectricity Investment and Development Company Ltd. (HIDCL) - 10 hire purchase companies - a postal saving bank - Cooperatives: estimated number 30,879, which includes 14,484 Saving and Credit Co-operatives (SACCO). - Table 2 (number of financial institutions 2018–2022) highlights changes: - Commercial Banks (class A): 2018: 28, 2019: 28, 2020: 27, 2021: 27, 2022: 26 - Development Banks (class B): 2018: 33, 2019: 29, 2020: 20, 2021: 18, 2022: 17 - Finance Companies (class C): 2018: 25, 2019: 23, 2020: 22, 2021: 17, 2022: 17 - Microfinance Financial Institutions (class D): 2018: 65, 2019: 90, 2020: 85, 2021: 70, 2022: 65 - Infrastructure Development Bank: 2018–2020: none listed, 2021: 1, 2022: 1 - Sub-total (selected BFIs): 2018: 152, 2019: 171, 2020: 155, 2021: 134, 2022: 127 - Life Insurance Companies sub-total (2018–2022): 18, 19, 19, 19, 19 - Non-Life Insurance Companies sub-total (2018–2022): 20, 20, 20, 20, 19 - Reinsurance Company (2018–2022): 1, 1, 1, 2, 2 - Other public financial entities (Employees Provident Fund, Citizen Investment Trust, Postal Saving Bank, Deposit and Credit Guarantee Fund, Credit Information Center Limited): each present across 2018–2022 with counts typically 1 - Social Security Fund appears starting in 2020 with counts 1, 1, 1 - Sub-total other public financial entities: 2018: 5, 2019: 5, 2020: 6, 2021: 6, 2022: 6 - Despite reductions in the number of BFIs via mergers and acquisitions, the value of bank assets continuously increased (see Figure 2 in source for time series). ### C. MACROFINANCIAL VULNERABILITIES - External sector pressures (2022): - Imports increased to 40 percent of GDP, compared to 36 percent a year ago. - Current account deficit widened from 7.8 percent of GDP to 12.8 percent of GDP from 2021–2022. - Declines in foreign exchange reserves were observed. - Remittances and tourism disruption: - Disruption of the tourism sector and sluggish remittance growth contributed to external risks (Figure 3 in source). - Monetary policy and banking funding (policy actions and effects): - NRB increased the bank rate, statutory liquidity ratio, and cash reserve ratio as part of contractionary monetary policy. - Deposit growth slowed; two months into fiscal year 2022/23 total BFI deposits decreased by 0.9 percent. - Total credit to deposit ratio reached over 90 percent as of 2022; banks are required to limit lending to 90 percent of deposits and other stable sources of funding. - Lending rates increased from 8.5 percent in August 2020 to 12.1 percent in September 2022. - Funding and market structure constraints: - Commercial banks obligatorily issue debentures as alternative funding, but their amount is limited by regulation. - Lack of liquidity in bond markets and limits for interbank lending add to funding challenges. - Asset quality and provisioning: - As of July 2022, NPL ratio for class A, B and C banks was 1.31 percent (compared to 1.48 percent in mid-July 2021). - Low reported NPLs reflect COVID-19-related restructuring, forbearance, rescheduling facilities, strict collateral regimes (mostly real estate), widespread use of additional guarantees, and blacklisting practices. - Underreporting risk exists due to evergreening practices, especially in the corporate sector and revolving working capital loans. - Banks’ capital positions may be vulnerable to large credit shocks because provisioning rules are conservative and do not account for collateral. - Banks’ NPLs are slowly rising due to higher interest rates in recent months. - Oversight of MFIs and SACCOs: - MFIs and SACCOs collectively represent 15 percent of financial sector lending. - Supervision of MFIs is compliance-based rather than risk-based. - SACCOs are large providers in terms of customers and institution counts; largest SACCOs exceed the size of some Class B and C banks. - Supervision of SACCOs occurs at local level, often by inexperienced authorities. - Lack of good data makes assessment of systemic risk from MFIs and SACCOs difficult. - Evidence exists of serious governance and liquidity issues in these institutions. - Structure of loans and collateral (as of July 2022): - Loans and advances by collateral type: Fixed Assets 75.1 percent; Current Assets 12.3 percent; Others 6.7 percent; Against Guarantee 4.1 percent; Fixed Deposit Receipts 1.4 percent; Against security of Bill 0.4 percent. - Loans and advances by type of financial institutions: Commercial Banks 75 percent; MFIs 8 percent; Development Banks 8 percent; Cooperatives 7 percent; Finance Companies 2 percent. - Capital market developments (as of 2021/22 and historical trends): - Nepal has one stock exchange, the Nepal Stock Exchange (NEPSE). - NEPSE Online Trading System became fully automated in 2021. - Daily market turnover amounts to nearly 3.8 percent of market capitalization. - Trading is highly concentrated: 83.5 percent of market traded value represented by a handful of banks and financial institutions. - As of 2021/22, 30 percent of total market capitalization consists of the largest ten companies. - Market volatility has increased; the capital market has grown larger and more complex. - Supervisory capacity at SEBON remained limited relative to rapid market changes. - Corporate paper and bond markets are largely absent; mutual fund issuance is progressing; government securities are not actively traded. ### D. STOCKTAKING OF PAST TECHNICAL ASSISTANCE - Since the 2014 FSAP, IMF (notably MCM) provided considerable TA focusing on strengthening financial supervision and regulation, liquidity management, and monetary policy operations. - The World Bank Group also worked with authorities on structural obstacles: financial stability challenges, underdeveloped non-bank financial institutions, gaps in payment systems, credit infrastructure, and financial inclusion. - The FSSR incorporates authorities’ experience implementing past TA and reflects a stock-take of progress and outstanding issues. - Selected IMF MCM Technical Assistance missions since 2014 (titles and dates as listed in source): - MCMCO: 03/14/2022–04/15/2022 — Interest Rate Corridor Under an Exchange Rate Peg - MCMCO: 01/31/2022–02/04/2022 — Central Bank Risk Management - MCMFR: 12/20/2021–12/23/2021 — Credit Risk Supervision - MCMFR: 09/12/2021–09/16/2021 — Off-Site Supervisory Capacity - SARTTAC: 04/07/2021 — Bank Supervision for SARTTAC Countries - SARTTAC: 03/15/2021–03/26/2021 — Monetary Policy Operations - SARTTAC: 11/04/2020 — Bank Supervision - MCMDM: 09/21/2020–10/01/2020 — Public Debt Management - (Additional missions listed in source covering topics such as supervisory capacity, liquidity tools, internal audit, monetary policy framework, cyber security, liquidity forecasting and management, payment system oversight, licensing procedures, liquidity management, banking supervision through 2014–2022.) ### 1. Diagnostic Review and Main Recommendations — A. BANKING SUPERVISION AND REGULATION - Progress and baselines: - NRB has enhanced supervision approach and planned regulatory changes to strengthen banking sector resilience. - Progress toward risk-based supervision and stronger regulations, including implementation of regulatory capital calculation approaches under Basel II. - NRB implemented new guidelines on working capital loans to address potential evergreening. - NRB implemented special pandemic measures to support the banking system and financial stability. - NRB conducts an annual onsite examination cycle for all Class A banks with a strong focus on credit risk management. - Remaining vulnerabilities and challenges: - Regulations remain largely rules-based and conservative (examples given: low LTVs and high RWAs; limits/caps such as interest ceilings and fee caps). - Limited progress on FSAP recommendations, notably absence of a framework for consolidated supervision. - Need to transition over time toward principles-based regulation to support bank risk management development. - Evaluation needed of limits on bank activities and directed lending which may cause distortions and unintended consequences. - Offsite supervision and analytics: - Need development of offsite analytical tools and training to strengthen offsite analysis and early risk identification. - NRB invested in a new software platform—the SIS—to automate capture of regulatory returns; combined with a revised offsite supervision manual, SIS should improve efficiencies and analysis. - Further TA required to develop offsite reports for benchmark analysis of key performance indicators across major risks. - Training needed to implement the revised supervisory manual and improve supervisors’ analytical skills using statistical reports, financial ratios, and peer group analysis to support Pillar II processes. - Human resources and specialist skills: - NRB HR policy rotates staff periodically; rotation promotes knowledge across central bank functions but can remove supervision expertise and institutional knowledge from the supervision department. - Development of risk specialists is needed to match the size, scale, and complexity of banks and banking groups and to support implementation of LCR and IFRS9. - Liquidity and funding pressures: - Intense competition in the deposit market is driving up interest rates and creating funding and liquidity stress for banks. - Banks are predominantly deposit-funded; slower deposit growth has led to rapid deposit rate increases. - Access to term funding is problematic due to underdeveloped capital markets: corporate paper and bond markets largely absent; government securities not actively traded; stock market dominated by financial institutions with thin liquidity and low turnover. - Plans to implement the Basel III LCR Framework are underway and should strengthen risk management and forward-looking monitoring of stressed liquidity. - Additional action required to address liquidity concerns and manage maturity mismatches: - High dependence on institutional deposits; many banks are severely affected if several large institutional depositors withdraw. - Contingency funding plans should be developed to assess readiness of alternative funding sources. - Development of secondary market for securities and liquid assets is a longer-term solution. - A quantitative assessment study is needed to assess sector readiness for LCR implementation and identify guidance/calibration needs. - Further work needed to develop NRB’s monetary operations so NRB can assist banks to manage liquidity positions effectively. *Source: IMF Technical Report – Nepal Financial Sector Stability Review, Introduction.* ### 19. Banks calculate regulatory capital using the Basel II framework, which contains significant ### 1nplea2023003 - 19. Banks calculate regulatory capital using the Basel II framework, which contains significant ### Capital framework and capital adequacy - All Class A banks meet the minimum capital ratio (MCR) of 8.5 percent. - A capital conservation buffer of 2.5 percent is applied in addition to the MCR (effectively raising the MCR to 11.0 percent). - The NRB plans to implement a countercyclical buffer in 2023. - Banks are required to meet a minimum leverage ratio of 4 percent. - Risk-weighted assets (RWAs) composition: - Credit risk is approximately 93 percent of system RWAs. - Operational risk ranges between 3–6 percent of RWAs. - Market risk is typically 1 percent or below. ### Capital supervision and disclosure - Supervisory Review and Evaluation Process (SREP) undertaken annually; adjustments to RWAs applied if deficiencies identified. - Banks issue debentures treated as tier 2, appearing more bond-like rather than permanent capital. - Banks disclose their MCR on a monthly basis; Pillar 3 disclosures are published on banks’ respective websites. - Despite historically high returns adding to Common Equity Tier 1, banks report relatively thin margins above the MCR. - With the planned countercyclical buffer, further analysis of pillar 2 processes and banks’ quality of capital is needed. ### Asset quality and provisioning - Industry NPL ratio decreased to 1.20 percent in mid-July 2022 as compared to 1.41 percent in mid-July 2021. - Asset quality deteriorated only marginally during COVID-19, aided by NRB special measures. - Deterioration drivers include higher interest rates impacting loan serviceability. - NRB implemented new guidelines on working capital loans to reduce evergreening; these guidelines will require facilities to align with new limits and amortize to zero over a specific timeline. - Revision to regulations for problem loans and provisioning is underway; transition to IFRS9 is planned for 2023/24. - Current provisioning: - Banks calculate provisions using NFRS and regulatory provisions based on loan classifications (Pass, watchlist, substandard, doubtful, and loss). - NRB increased provisioning for ‘Pass’ loans from 1 percent to 1.3 percent. - Onsite examinations focus strongly on loan classification and provisioning; NRB requires adjustments to loan classifications and incorporates asset quality outcomes into the SREP. - Transition to IFRS9 will require expertise estimating probabilities of default (PD) and expected loss given default (LGD) and additional systems, data, and statistical modelling capacity. - A comprehensive review of loan classifications, treatment of restructured loans, and loan loss methodology alongside IFRS9 transition is warranted to ensure provisioning is accurate and conservative. ### Credit risk data, concentrations, and real estate exposures - Credit risk is the largest risk in the system; some dimensions remain opaque. - NRB evaluates credit risk from the real estate sector (owner-occupied mortgages, investment-led mortgages, and CRE) as moderate. - Most real estate lending is amortizing; key housing finance risks include price fluctuation and changes in government policies (approval of plot separation, classification of land, etc.). - Credit risk reporting gaps to the NRB: - Exposures are not reported by type (e.g., margin loan), vintage (e.g., 2021), LTV, debt-to-income ratio, or purpose (e.g., investment). - Reporting is often based on stock rather than flow. - Example: high growth in margin lending in the first half of 2021 could not be broken down to granular risk metrics in NRB submissions. - New SIS should improve reporting, but more effort was needed at the time of the mission. ### Supervisory coverage and consolidated supervision - Banks have relatively simple structures, but absence of an explicit consolidated supervision framework constrains NRB powers. - Revision of regulations should include explicit mention of consolidated supervision and be accompanied by updates to supervisory reporting requirements, supervisory manuals, and staff training. ### Operational risk, continuity planning, and climate risk - Main operational risks: misuse of technology and fraudulent activities. - In some banks, close to half of all transactions are delivered outside the branch channel (with significant geographic differences). - Current requirements for operational risk, business continuity planning (BCP), and disaster recovery (DR) are general; greater prescriptiveness is recommended, especially for larger/systemic banks. - Nepal is highly vulnerable to climate-related financial risks from landslides, floods, and storms. - NRB should consider integrating climate-related financial risks into banking supervision processes and bank stress testing. ### Main recommendations (selected items from 29–37) - Strengthen supervisory skills and add risk specialists in credit risk, liquidity risk, IT, and provisioning through: - Short-term secondments to industry. - Short-term secondments with regional supervisors. - Supervisory training manuals. - Succession planning. - Review rotation policy for banking supervision. - Develop analytical tools to enhance offsite surveillance and forward-looking risk assessments, leveraging SIS data. - Assess liquidity regulations and supervisory processes: - Develop bank contingency funding plans. - Undertake a quantitative assessment of the introduction of the LCR. - Longer-term plans to diversify bank sources of funding. - Assess credit risk supervisory processes: - Targeted review of bank credit policies/processes for consistent implementation of the Working Capital Guideline. - Assess bank policies/processes and reporting of connected lending exposures and lending to shareholders. - Review large exposures and risk concentrations. - Assess regulations for problem assets and loan loss provisioning: - Review loan classifications and treatment of restructured loans. - Engage with industry to identify IFRS9 implementation challenges. - Undertake sensitivity analysis on potential credit deterioration of revolving working capital loans to capture evergreening risks. - Implement a comprehensive framework for consolidated supervision, sequencing implementation to include: - Amend regulations with industry consultation and agreed timeline. - Train Banking Supervision Department staff. - Update and revise supervisory manuals. - Review reporting requirements to align with new regulations. - Assess group structures to identify ultimate beneficial owners and group-wide affiliates. - Revise requirements for BCP and DR planning with greater prescription for larger/systemic banks. - Reconsider phasing out directed lending programs; evaluate alternative schemes to achieve intended outcomes without compromising safety and soundness. ### Stress testing — baseline diagnostics - Stress testing is conducted: - NRB conducts simple micro solvency and liquidity stress tests quarterly since 2012; MFIs are not stress tested. - All three types of banks (commercial banks, development banks, and finance companies) included. - Exercise comprises a high number of simple prescribed scenarios (in total about 30, most single factor scenarios). - Risks covered: credit risk, interest rate risk, FX risk, equity price risk, and liquidity risk based on deposit withdrawals. - NRB has been revising tests, adding shocks and plans small improvements (such as adding a reverse stress test). - Use of results: - Results used by NRB and participating banks for monitoring risk profiles. - Annual inclusion in the Financial Stability Report and discussion at the Financial Stability Oversight Committee. - Banks discuss results quarterly at risk committees and board; include NRB stress tests in ICAAP. - Credit risk specifics in stress tests: - Based on prudential provisioning rules for individual loan classes specified by NRB. - Not all possible migrations among loan classes are included; restructured loans not explicitly captured. - Per NRB rules, collateral value behind defaulted loans is not taken into account when creating provisions. - Credit risk scenarios include concentration risk by assuming the top 2 borrowers default and move to loss category. - Market risk and interest rate treatment: - Only net interest income effect of changes in interest rates is captured. - Government bonds/bills held to maturity in amortized cost; secondary market is virtually non-existent. - Direct FX risk and equity price risk included; typically small given NRB limits: - Net FX open position limit of 30 percent of capital. - FX lending allowed only to hedged borrowers. - Depreciation effects on domestic-currency value of FX-denominated assets are currently not included in micro stress tests. - Liquidity stress tests: - Based on various deposit withdrawal scenarios. - In most cases, banks’ Net Liquid Assets (NLA) ratio decline below regulatory limit of 20 percent, but not to zero or negative. - One scenario combines solvency and liquidity shock assuming top 2 interbank lendings of each bank go from performing to non-performing. ### Stress testing — identified shortcomings and recommended enhancements (from paragraph 45) - Shortcomings in current sensitivity-based micro stress tests: 1. Too many credit risk scenarios with shocks calibrated somewhat randomly, without a clear ordering by level of stress; no data enabling comparison of assumed migration rates with observed migration rates. 2. Solvency stress tests lack an explicit horizon over which shocks materialize; pre-provision income is not taken into account as a first line of defense. 3. Interest rate shock impact calculation is not realistic: - Most loans are variable and linked to bank base rates; banks can pass deposit rate increases to borrowers. - Interest rate increases would typically cause borrower defaults, reducing interest-bearing assets and net interest income indirectly, which is not captured. 4. No haircut assumed for bonds and bills in liquid assets, despite NRB marginal lending facility applying a 10 percent haircut; funding shocks could be richer by differentiating withdrawals by funding type (retail vs wholesale deposits, current vs fixed deposits, debentures, interbank loans). *IMF | Technical Report – Nepal Financial Sector Stability Review (selected section).* ### 46. There are no macro (top-down) solvency, or liquidity stress tests conducted at the NRB. ### 1nplea2023003 - 46. There are no macro (top-down) solvency, or liquidity stress tests conducted at the NRB. ### Current diagnostics and gaps in stress testing and interconnectedness analysis - 46. There are no macro (top-down) solvency, or liquidity stress tests conducted at the NRB. - So far, the NRB relies only on the quarterly micro stress tests to assess resilience of the financial institutions and the banking system as a whole. - Options were discussed during the last two years to create a top-down solvency stress tests based on macroeconomic scenarios and a satellite model for NPLs, but no concrete steps have been taken yet. - 47. No detailed intra-financial sector interconnectedness analyses and domino-type contagion simulations are conducted at the NRB. - Interbank exposures: short-term uncollateralized interbank loans exist (maturity can only be up to seven days; no long-term deposits between banks are allowed) and the NRB has the data about them at its disposal. - Additional interlinkages with non-bank financial institutions such as MFIs, insurance companies, purchase and hire companies, or SACCOs should be analyzed and the risk of contagion across the various segments of the financial system assessed. - 48. Top-down macro stress tests and interconnectedness analyses form part of macro-financial surveillance typically conducted by a dedicated financial stability unit. Peer central banks in the region with such units include India, Sri Lanka, Vietnam, Cambodia. - 49. The NRB has a small financial stability unit within its Regulation Department charged with preparing the annual Financial Stability Report, but systematic and regular system-wide monitoring of risks and vulnerabilities is missing. - The Financial Stability Report currently serves more as a backward-looking summary and lacks a clearer up-to-date risk outlook and forward-looking projections. ### Main recommendations — micro stress testing (methodology and scope) - 50. Revise NRB micro stress testing methodology and templates to be more realistic and aligned with best practices. - Transform solvency part into a projection exercise with a horizon of one year, where banks consistently project selected balance sheet, P&L, and capital adequacy items under stress. - Use a limited number of scenarios (say 3 to 5) combining credit risk and market risk, ordered by level of stress (e.g., mild/moderate/severe). - 51. Define credit risk shock in all scenarios as a simultaneous deterioration of loan quality across all loan classes; use the whole migration matrix rather than isolated transition tests. - Continue using prudential provisioning rules even after introduction of IFRS 9 in 2024/25 as the NRB plans to keep them. - Calibrate stressed credit migration matrices based on analysis of observed migration rates, requiring historical data on loan migrations (from the CIB or ad-hoc bank collection). - Banks to report their last own migration rates in each stress test round (past year or two). - 52. Make calculation of impact on net interest income more realistic: - Consider the base rate mechanism, usual risk premia, and time lag between increase in funding costs and base rate/loan rate changes. - Reflect that new NPLs lower interest-bearing assets, decreasing net interest income even if net interest margin remains the same. - 53. Project key P&L items beyond provisions and net interest income: - Include non-interest income (fees & commissions, etc.) and other operating expenses (administrative costs, etc.) with pre-set parameter guidance (e.g., administrative costs equal to last year; non-interest income slightly decreased in stress scenarios). - Use projected net income to impact core regulatory capital rather than simple deduction from capital. - 54. Calculate end-horizon risk weighted assets (RWAs) consistently with existing NRB rules: - Split credit portfolios into performing and non-performing parts; assign elevated risk weights (150 percent for real-estate loans and other loans) to non-performing exposures net of provisions. - Recognize that depreciation of local currency increases FX-denominated RWAs, putting additional pressure on capital adequacy ratio. - 55. Use projection-oriented supervisory stress tests to enhance supervisory review and improve banks’ own stress testing and business-plan discussions. - Encourage banks to adopt NRB micro stress scenarios, build additional scenarios, and potentially increase complexity beyond NRB templates. - 56. Use micro stress test results to calibrate Pillar 2 additional capital charges: - Require banks to survive mild or moderate stress scenarios and set Pillar 2 buffers accordingly. - 57. Improve liquidity micro stress tests with small adjustments: - Add haircut on government bills and bonds to reflect NRB liquidity provision rules. - Add explicit time horizon for deposit withdrawal scenarios, e.g., deposit withdrawal rate per day to construct survival horizon metrics. - Differentiate deposit types (current versus fixed, retail versus wholesale), stress other funding sources (maturing debentures, interbank loans), and include off-balance sheet shocks (commitments turning into loans). - Consider additional adjustments after implementation of the LCR. - 58. Include MFIs in micro stress tests on a proportionate basis: - MFIs account for about 8 percent of total loans of all financial institutions involved in lending (same as development banks). - Use a 1-year projection approach for MFIs with simplified methodology/templates; implement sequentially starting with the largest MFIs as part of a move to risk-based supervision. ### Main recommendations — developing top-down macro stress testing and interconnectedness analysis - 59. Develop a top-down macro solvency stress test: - Build a state-of-the-art solvency framework based on alternative macroeconomic scenarios, credit risk satellite models, explicit assumptions about pre-provision income, and consistent projection of banks’ balance sheet and P&L items ideally over a 3-year horizon. - Include all supervised banks and financial institutions including MFIs. - 60. Involve the NRB Research Department in calibrating macroeconomic scenarios: - The modelling team is upgrading macroeconomic projection models and will provide projections of key macro-financial variables and help estimate satellite credit risk models. - Use a baseline macroeconomic scenario alongside several calibrated stress (adverse) scenarios. - 61. Use longer projection horizon to capture additional analyses: - Explicitly capture collateral realization (banks typically recover credit losses by selling collateral within the next 1–2 years). - Include assumptions about the real estate market and potential property market corrections affecting recovery rates. - 62. Leverage IFRS 9/NFRS 9 implementation in fiscal year 2024/25 to collect credit risk parameters: - Compile historically consistent time series of PD and LGD from all banks, by loan categories, to advance to macro-scenario-based top-down stress tests where PDs and LGDs are modeled as functions of macro-financial variables rather than relying on NPL ratios. - 63. Include an interconnectedness/contagion block in the macro stress test: - Start with interbank exposures and progressively add non-bank financial institutions (MFIs, insurance companies, purchase and hire companies, credit cooperatives) to capture domino-type contagion effects. - 64. Develop macro liquidity stress test after LCR implementation: - Current data do not support a top-down liquidity stress test in parallel to micro tests; post-LCR, a cash-flow based top-down liquidity stress test using granular LCR-reported exposure and cash flow data could be developed. - Assess value added if micro liquidity stress tests are also revised to be based on LCR data. ### Institutional strengthening and operational recommendations - 65. Strengthen role, staffing and capacity of the existing financial stability unit: - Charge the unit with regular monitoring of systemic risk, financial sector trends, and macro-financial vulnerabilities, reporting internally in quarterly frequency and proposing prudential policies. - Continue responsibility for the annual Financial Stability Report but shift from a backward-looking summary toward risk-oriented forward-looking projections for policymakers and the public. ### Crisis management and resolution—baseline diagnostics and gaps - 66. Review focused on effective banking resolution, crisis management, and early intervention; framework has significant gaps vis-à-vis FSB’s KAs and IAIS Core Principles for Effective Deposit Insurance Systems. - 67. Recent legislative amendments to the NRB Act broaden the resolution toolkit, but significant gaps remain: - Lack of sufficiently detailed operational plans for implementation of resolution. - Need for stronger alignment across laws, by-laws, and regulations (e.g., liquidation triggers and processes in NRB Act need better alignment with the Banking and Financial Institutions Act). - Problem Bank Resolution Framework provided by World Bank TA is not synchronized with existing legislation. - No resolution simulation exercise undertaken to test authorities' preparedness and inter-agency cooperation. - 68. Laws do not assign a clear mandate to the NRB as resolution authority; resolution powers are provided under the same legislation as broader functions and supervisory responsibilities, with operational separation lacking. - Gaps include lack of clear resolution objectives, no group resolution powers, no explicit powers for bail-in, absence of NCWO safeguards, uncertain creditor hierarchy, and missing legal protection for NRB, its directors and staff, and agents engaged for resolution purposes. - 69. NRB has relatively strong powers to direct banks to take corrective actions (order recapitalization, remove/replace directors and officers, appoint an “officer” or take over management), but procedural requirements are complicated (e.g., hearings before placing an official or 30-day notice for reducing capital), limiting effectiveness. - 70. Current resolution framework based on special administration regime with broad NRB powers; includes bridge bank tool and court-based bank liquidation under Bank and Financial Institution Act. - 71. Financial sector safety net is underdeveloped: - DCGF provides both deposit insurance coverage and credit guarantee services to member banks, with funds kept separately. - Recent Deposit and Credit Guarantee Regulation Act provides additional functions to DCGF, but the framework remains largely underdeveloped and inoperative. - NRB needs to further refine ELA policies and procedures. - 72. Coordination and preparedness shortcomings: - Nepal has a high-level Coordination Committee (CC) led by the Minister of Finance with NRB Deputy Governor and heads of Securities Exchange and Insurance Board as members, but the CC meets on an ad hoc basis with no supporting legislation or formalized rules and has not discussed crisis management issues. - The MOF has been absent from formulating crisis preparedness matters; no guidance exists for the government’s potential role in bank resolution or providing backstop for the DCGF or indemnities for ELA. *Source: IMF | Technical Report – Nepal Financial Sector Stability Review* ### 73. Nepal has seen two failures of licensed financial institutions in the last ten years, which ### 1nplea2023003 - 73. Nepal has seen two failures of licensed financial institutions in the last ten years, which ### Background on past failures and supervisory approach - Nepal has seen two failures of licensed financial institutions in the last ten years, which were contained to category ‘C’ banks. - 12 licensed financial institutions have been declared problematic (including 10 category ‘C’ banks and 2 category ‘B’ banks), but most of them have recovered. - Only 1 bank failure has led to deposit payouts by the DCGF. - The NRB has encouraged consolidation and mergers through a moratorium on category A, B, and C licenses and moral suasion. - Problematic financial institutions have largely been kept operating as “problem banks” while the NRB sought new investors. ### Resolution framework — key recommendations and objectives - The FSSR recommends inclusion of more tangible and granular objectives and principles into the NRB Act, including: - (i) maintaining continuity of critical functions in the case of resolving systemically important banks; - (ii) the use of public (government) support as a last resort; - (iii) the principle of private loss absorption and the lesser cost than liquidation test. - Explicit mention of resolution objectives is intended to help the NRB guide and justify actions, limit potential litigation risk, and provide justification for court review. ### Risk assessment, supervision, and early intervention - The NRB should enhance its risk assessment framework to be more forward-looking and to create a structured link between assessed bank risk and supervisory attention. - Supervisory data availability and timeliness should be ensured; the regulatory framework requires updating to better capture various risks. - Off-site monitoring should rely on a more comprehensive set of data and early warning indicators. - Stress testing is improved and institutionalized but: - is still at an early stage, - relies on single factor sensitivity analyses, - has not progressed to being a useful mechanism for informing supervisors of emerging risks or for calibration of prudential requirements. - Prompt Corrective Action (PCA) framework recommendations: - Provide more specific and structured guidance via clear escalation processes under and between various states of distress and early interventions (in addition to those provided for capital shortfall). - PCAs should be carried out in a fast and efficient manner; several NRB Act provisions may cause significant delays. - Temporary administrator tools should be used sparingly and keep the mandate short, preferably expiring within six months (or one year with an extension). - Clearly distinguish failed or likely-to-fail banks from institutions at earlier stages of distress. ### Recovery and resolution planning - The NRB should establish recovery planning requirements: - Recovery plans should be prepared by banks, based on NRB guidance. - Initially require recovery plans for systemically relevant banks; over time make them mandatory for all banks and other institutions supervised by the NRB. - Regulations should specify minimum trigger points for invoking plans and actions, while recognizing bank-specific tailoring. - Require recovery plans for two categories of scenarios: - idiosyncratic shocks (only the bank in question impacted while the banking system is sound); - systemic shocks. - The NRB should develop resolution plans for how it would resolve a bank, starting with larger institutions: - A resolution plan details institution characteristics and preferred resolution strategy including resolution tools. - Run parallel with resolvability assessments to identify impediments and ensure sufficient loss-absorbing capacity. - Recovery and resolution planning should be iterative so resolvability assessments inform and test resolution plans’ feasibility. ### Legal and toolkit improvements - While the revised NRB Act provides broader options for bank resolution, the tools and procedures should be substantially streamlined and clarified: - In-depth coverage for the new powers to create a bridge bank or conduct a purchase and assumption (P&A) transaction is lacking in the current legal framework. - Banks under resolution are prohibited to accept deposits and extend credit, which may undercut their revenue-generating ability and undermine going concern prospects. - The purpose of discussing creditor hierarchy and compensation under resolution (before liquidation) is unclear. - Strengthen good-bad asset separation powers; transfer of non-core assets to a special asset management company may be useful in extraordinary circumstances. - Use broad resolution powers to trigger special administration early to restructure a bank in going concern under public controls. - Invest resources in preparing resolution manuals for all available resolution tools: - Operationalize new resolution tools given legal complexities. - Consider applying multiple resolution options. - Bridge banks should be considered for systemic crises and possibly for small bank resolution when several smaller banks fail. - Prepare modalities for funding resolutions by the deposit guarantee fund and the government (in the case of a bridge bank). - Over time, ensure banks bear costs of their failures through increased loss absorbing capacity (e.g., contractual bail-in instruments). - Introduce a single, elaborated creditors’ hierarchy and the NCWO principle: - Introduce NCWO (no creditor worse off) as a legal safeguard in future legislative amendments. - Include explicit pari passu provision in treating creditors to strengthen property rights. - NCWO ensures no shareholder or creditor faces higher losses than under the hypothetical liquidation counterfactual, or if they do, they have a right to compensation. ### Lender of Last Resort (ELA) and eligibility - NRB regulations on Lender of Last Resort are a significant improvement, but further progress is needed: - Central banks should provide ELA only to solvent institutions expected to remain adequately capitalized in the foreseeable future. - ELA procedures in Nepal should better incorporate reliable solvency, viability and capital assessment processes; NRB Act and regulations should make this clearer. - Critical for NRB to have up-to-date bank financial granular data in the shortest time-frame to assess ELA eligibility. - Recommend separating those who assess bank capital, liquidity and viability from those who advise the NRB board on providing ELA and its terms. - Law should be clearer that ELA is provided at a penalty rate, preferably as a margin above the main lending rate. - Consider expanding the collateral list for ELA. - Consider allowing banks in resolution to be eligible for ELA when experiencing temporary liquidity problems: - A bank slated for resolution and recapitalization (via bail-in and/or, as last resort, public support) may satisfy forward-looking solvency criteria. - This should be based on time-criticality of resolution and maintain the legal requirement to grant liquidity only to solvent banks. - NRB may consider bank solvency at the moment a decision is made to recapitalize and restore solvency. - ELA should not be given to an insolvent entity in liquidation as currently foreseen in regulations. ### Deposit insurance and DCGF issues - The DCGF is at a nascent stage: - New law provides option to use DCGF resources for funding P&A, but modalities are vague and insufficient. - No clear view on deposit coverage; for instance, share of deposits fully covered by the current coverage limit (NPR 500,000 or about USD 8,000) is unclear. - Eligibility of a depositor and of each deposit product for deposit insurance protection is assessed manually, impeding timely and efficient payouts. - Authorities should consider separating deposit guarantee functions from credit guarantee functions given minimal mandate overlap. - Strengthen focus on systemically important functions. ### Crisis management, interagency cooperation, and governance - The current resolution framework and interagency cooperation modalities are not suitable for addressing a failure of a large bank with systemic implications. - High-level Crisis Committee (CC) should be formalized: - Establish a subcommittee under the CC to focus solely on systemic financial crises. - Subcommittee could be led by a high-level NRB official and include DCGF representatives. - Subcommittee would prepare nationwide contingency planning based on agency-wide contingency plans and recommend whether an event represents a systemic crisis to trigger exceptional provisions. - Strengthen NRB–MOF coordination: - Close coordination between NRB and MOF is essential in responding to bank distress or failure. - MOF involvement is critical at all stages of systemic financial crisis. - Establish a Memorandum of Understanding between NRB and MOF to set out respective responsibilities in responding to banking distress or failure. - NRB regulations and internal procedures should specify how powers will be used; strong safeguards needed before public funds are used, including ensuring existing shareholders bear the first loss. - Reinstitute a Problem Bank Resolution Unit at NRB: - A small, cross-departmental unit of two or three legal and financial sector experts would operationalize laws and guidelines and serve as an operational nucleus expandable during systemic threats. - Legal protection for resolution actions: - Legal protection should be enshrined in the NRB Act extending to the NRB, NRB Board members, NRB staff, and persons/entities engaged by NRB for resolution matters, immunizing them from liability and indemnifying legal costs provided actions were within conferred powers and taken in good faith. ### Payment systems — baseline diagnostics - Nepal has modernized payment systems since the Payment System Development Strategy (2014); NRB is overseer, operator, and catalyst of payment systems. - Legal basis for oversight and development includes: - Payment and Settlement (PS) Act 2019, - Payment and Settlement Bylaw 2020, - Payment Systems Inspection and Supervision Bylaw 2021, - Licensing Policy for Payment Related Institutions 2016. - NRB implemented a RTGS system in 2019, replacing semi-automated GL entries for inter-bank settlements. - Retail payment landscape developments include connectIPS, IPS, Mobile Banking, Internet Banking, Wallets, and QR Code. - National Clearing House Limited (NCHL) operates key retail payment systems including check clearing and IPS. - Digital Nepal Framework (2019) serves as a reference for NRB policies, regulations, and strategies for payment systems. ### Payment systems — identified gaps and recommendations - Legal gaps: - Provisions for finality and netting enforceability in the Payment Systems and Settlement Act appear not to be given precedence over insolvency laws or address zero-hour rules, creating legal uncertainty and systemic disruption risks if a participant becomes insolvent. - Organizational and staffing issues: - Payment Systems Department (PSD) oversight unit supervises 37 payment system operators (PSO) and PSPs. - PSD is understaffed with 5 unfilled positions. - Most experienced PSD staff have less than 3 years in payment systems oversight. - NRB rotation policy rotates staff every 2–3 years (except IT Department), which risks continuity. - Separation of oversight and RTGS operator functions within PSD does not sufficiently address conflicts of interest. - Working arrangements among PSD and other operational departments for RTGS are not formalized and documented, risking ambiguity in roles, responsibilities, and compliance with international standards. - NRB noted a RTGS User Manual and a document describing work division and responsibilities exist. - NRB is a 10 percent shareholder in NCHL, and its Executive Director (ED, Banking Department) is the chairman of NCHL, creating potential conflict-of-interest given NRB’s role as overseer. - Main recommendations for payment systems: - Review the legal framework to identify and address gaps including finality and irrevocability of transactions, zero-hour rules, and enforceability of netting; fully consider PFMI principles. - Fill the five vacancies in PSD immediately via rotation or external hiring or a combination; send existing and new staff for PFMI training. - Limit the number and frequency of rotation of specialist payment systems staff and plan for succession before rotating staff out to ensure continuity. - Publish English versions of all key laws, regulations, and directives to promote accurate understanding among BFIs and potential investors. - Separate oversight and operator function at the ED level or higher and formalize internal arrangements for RTGS, including reporting requirements, supervision responsibilities, and roles of internal audit, risk management, and other departments. - Consider divesting NRB’s shareholding and relinquishing chairmanship in NCHL; instead use moral suasion or oversight powers under the PS Act to achieve policy outcomes. *Italic: IMF | Technical Report – Nepal Financial Sector Stability Review* ### 94. The NRB has been supervising payment systems and guided them to observe the PFMI ### 94. The NRB has been supervising payment systems and guided them to observe the PFMI ### PFMI adoption, designation, and disclosure - Findings: - NRB has supervised payment systems and guided them to observe the PFMI but has not formally identified and designated systemically important payment systems in Nepal. - As a result, these payment systems are not subject to the higher international risk-management standards, PFMI. - Self-assessments for payment systems have not been conducted nor disclosure frameworks (DF) been published for any payment systems. - NRB intends to develop a framework for the designation of systemically important payment systems by the fiscal year ending July 2023. - NRB intends to designate the RTGS system, Electronic Cheque Clearing (ECC), and connectIPS, but is unsure about FonePay (an instant payment system) or credit and debit card systems. - NRB has not established whether its RTGS foreign currency settlement should be subject to cooperative oversight. - Main recommendations: - Develop Financial Market Infrastructure (FMI) designation framework. The criteria used for identifying systemically important payment systems should be consistent with the definition in PFMI. Designation of the systems should follow immediately. - Formally adopt PFMI through regulations or directives that apply all the principles to designated systems. - Conduct self-assessments against PFMI and publish DF for the NRB’s RTGS Operations Unit, and all designated payment systems, such as ECC and connectIPS operated by NCHL. The oversight unit should review these self-assessments, and ensure the DF is published at least once every two years. In addition, it should assess itself against the authorities’ responsibilities in the PFMI. - Establish whether there is a need for cooperative oversight with other payment system regulator for the foreign currencies settled through RTGS system. NRB should start by informing the relevant authorities in line with Responsibility E Key Consideration 2 for its multi-currency RTGS. - Implementation note: - The NRB PSD has included these items in the action plan of FY 2022/23. ### Enhance RTGS system and increase utilization - Baseline diagnostics / findings: - The RTGS system currently does not support fully automated Intraday Liquidity Facilities (ILF), and is not fully utilized to support the growth of the banking and capital market sectors. - RTGS has operated since 2019, but NRB continues to settle payments between banks for high-value checks (above NPR 300 million) via the GL system, suggesting settlement risks remain. - Many government agencies prefer to use checks and do not have processes or mechanisms to use RTGS services, nor do they have direct RTGS access. - Some BFIs who are not direct participants prefer GL transfers at the central bank instead of investing in new processes to utilize RTGS services. - Figures of GL transfers appeared relatively large at the time of the mission but could not be confirmed by the NRB. - While RTGS supports automated ILF, it has not been utilized because of the absence of an automated and dematerialized collateral management system. - Full automation of the ILF can be implemented only when government securities needed as collateral for liquidity provision has been dematerialized. - The Public Debt Management Office (PDMO) of the MOF is embarking on a Debt Operations Management System (DOMS) that will make securities electronic; this could take up to two years. - The RTGS system settles Nepalese rupee, US dollar, euro, British pound, and yen payments transactions. - Some settlement rules for foreign currencies may be implied from Nepalese rupee rules but may not clearly and adequately address foreign currency settlement (e.g., ILF inference, no description of intraday liquidity management for foreign currencies). - NRB noted that there is no cross-border settlement of foreign currency in the RTGS system. RTGS settlement for foreign currency only takes place among domestic BFIs. - Main recommendations: - Increase utilization of the RTGS for interbank payments. Consider measures that discourage the use of the GL system for transfers between banks as it increases operational, liquidity and settlement risks. Measures could include mandating that high-value payments must be settled through RTGS instead of via checks and GL transfer, with the goal of eliminating them. - Expedite the dematerialization of government securities to facilitate the full automation of the intraday liquidity facility available to participants. NRB should work with PDMO to accelerate the de-materialization of government securities and complete the DOMS project as soon as possible. It should also start to plan and design to integrate or interface with DOMS to achieve delivery-vs-payment to reduce lead time. - Review the RTGS Rules document and enhance the description of the design and operations of the RTGS for foreign currencies. The scope should include specific details on the settlement process, queuing, gridlock resolution, liquidity facilities, operational timings, among others, that may apply to foreign currencies or otherwise. NRB should continue to monitor growth in foreign currency and have plans for intraday liquidity risk management. ### Improve operational and cyber resilience - Baseline diagnostics / findings: - NRB issues IT Security directives to PSP and PSOs and updates them on a regular basis; the latest directive was issued in 2022 and contains cyber security and resilience elements. - The directive does not sufficiently cover specific cyber resilience requirements such as the need for cyber resilience framework, governance, cyber response, and recovery plans to meet the 2-hour recovery time objective (RTO), specific cyber testing with key service providers, among others. - NRB plans to issue a specific cyber resilience directive aligned with the Guidance on Cyber Resilience for FMI by the fiscal year ending July 2023. - NRB has cyber security policies and strategies and will implement Cybersecurity Info Sharing platform in the fiscal year 2022/23, Financial section CERT in 2022/23 and securities operations sector in 2024/25. - A Chief Information Security Officer (CISO) was appointed in July 2022 but does not have a dedicated team; instead taps the Info-security Unit of the Information Technology Department (ITD), who do not have direct reporting to him. The CISO also heads the new Financial Inclusion unit formed around July 2022. - NRB is temporarily occupying annex buildings while the main central bank building is undergoing repair; an IT asset was seen operating in open areas of one annex building, exposing network and systems to sabotage and unauthorized access. - In supervision, PSD relies on ITD staff to assess PSP/PSOs’ cybersecurity and IT risk management, but the ITD staff assigned for inspections usually have limited or no IT audit experience and may have conflicting ITD duties. - Cybersecurity incidents are increasing in Nepal, with recent successful attacks on a bank’s SWIFT system and a payment switch. - Banks are required to comply with the SWIFT Customer Security Program (CSP); NRB’s RTGS does not rely on SWIFT but on VPN using a CA/PKI security infrastructure. There is no requirement for RTGS participants to comply with an equivalent CSP, and NRB has not conducted any assessment on wholesale payments fraud risk related to endpoint security for RTGS. - DR arrangements are in place for RTGS, but there are no BCM and plans. Bank participants have conducted drills for their RTGS front-end systems, but the RTGS system itself has not conducted any drills. - NRB’s BCM Committee is overseeing the development of a BCM framework and expects its completion in fiscal year ending July 2023. - Main recommendations: - Ensure cyber resilience guidelines being drafted are aligned with the CPMI-IOSCO Guidance on Cyber Resilience for FMI before issuing them. The guidelines should also be issued by other supervisory departments to their regulated entities. - Establish a dedicated team of information and cyber security officers with direct reporting to the CISO to assist in executing NRB’s cyber strategy and completing major cyber initiatives in a timely manner. - Review the physical security of systems and network infrastructure to identify weak links and adopt comprehensive physical security policies addressing all potential vulnerabilities and threats. - Build IT risk supervision capacity by hiring or identifying and training a pool of IT staff experienced in IT risk management and certified in IT Audit for supervision, potentially at the organizational level to support other supervision departments. - Review and adopt the CPMI Wholesale Payment Fraud End-point Security elements to the greatest extent possible for the RTGS system. Develop a security controls framework for RTGS participants that includes a security attestation, potentially modelled against the SWIFT CSP. - PSD should immediately develop BCP for RTGS and test it regularly. The plan should have a 2-hour RTO, including for extreme but plausible scenarios such as wide-area disruptions. BCP should be tested at least annually. NRB should consider implementing an alternate to the RTGS system that is non-similar and can settle time-critical transactions for scenarios where it is not able to recover in 2 hours. ### Strengthen prudential supervision, oversight and user protection of e-money and emerging payments - Baseline diagnostics / findings: - NRB has issued 27 licenses to PSPs, of which 25 perform only e-money or domestic money transfer functions and the other 2 PSPs perform card payment functions. - The current licensing regime for PSPs is mostly limited to e-money and domestic money-transfer and may not be conducive to innovative payments services. Payment activities such as merchant acquisition and payment aggregators are not provided for in the licensing policy and may cause uncertainty if left unregulated. - There are funds-in-transit and operational risks that may negatively impact consumer confidence if they materialize. - Safeguarding requirements for e-money PSPs require segregation of customer funds, holding them with a settlement bank, and daily reconciliation. Selection of settlement bank is subject to NRB approval and limited to Class A banks. Onboarding requirements exist for agents of e-money PSPs. - Current safeguards do not protect funds from insolvency of the e-money PSP or settlement bank. NRB limits e-money PSPs to holding funds with only one bank, creating concentration risk. - NRB is exploring CBDC and issued a concept paper for public consultation in August 2022. NRB’s key policy goals for considering CBDC are better access to payments, providing resilience to payment systems and reducing costs of cash handling. CBDC, if issued, has potential financial stability implications. - Main recommendations: - Review whether legislation and regulations need modernization to keep pace with efforts to foster payment innovation. Consider a study into activity-based, risk-focused regulatory regimes for payment systems for the Nepal context. - Review safeguards to protect float against insolvency of an e-money issuer or its settlement bank and ensure other e-money measures are comprehensive. Safeguards could include insurance, bank guarantees, trust account, undertaking by banks, among others, making reference to good practices published by IMF and CPMI/World Bank. Allow PSPs to hold float in high quality liquid asset with multiple settlement banks to diversify risks. - Make a fully informed decision on whether to issue CBDC. If so, incorporate design features that support public policy objectives and ensure an efficient, resilient, and competitive payment system. ### Financial inclusion (high-level findings and recommendations related to payments context) - Findings: - Access to formal financial services increased from 25 percent of adults in 2011 to 54 percent in 2021 (World Bank). - NRB requires financial service providers to establish a certain number of “brick and mortar” access points and dedicate a prescribed percentage of lending to deprived sectors. - There is a growing number of digital financial services such as e-money, QR code payments, and digital credit. - NRB has a financial inclusion dashboard collecting metrics from Class A, B, and C banks; gaps remain in data for MSMEs (demand side) and gender disaggregated data for loans and payments. - Nearly half of adults remain excluded; women are less likely to have an account than men. Usage of accounts is low and many bank and e-wallet accounts are dormant. - NRB’s hands-on approach (credit allocation, branch location requirements) may now inhibit market-driven approaches as the sector develops. - Recommendations: - Evaluate where NRB could revise branching and lending requirements to permit more demand-driven, market-friendly approaches by FSPs; do so gradually based on evidence of program impact. NRB is planning an external evaluation of directed lending programs. - Enhance data collection for MSME credit (demand side) and gender disaggregated data, and include MFI information in the Financial Inclusion Dashboard. NRB noted it has conducted a baseline survey to identify gender and geography disaggregated demand side data; the survey report is in the final stage of public dissemination. NRB will also include MFIs in the Financial Inclusion Dashboard. ### Savings and Credit Cooperatives (SACCOs) - Findings: - There are an estimated 14,484 SACCOs serving urban and rural customers. - SACCOs provide important services including to women and some offer digital services via partnerships with licensed providers. - SACCOs are largely unsupervised and show signs of widespread governance issues, insider abuse, over-lending, and liquidity constraints that have prevented customer access to deposits. - Many SACCOs are small and local, but others have total deposits exceeding that of some Class B and C banks. - Risk in the SACCO sector appears to be increasing due to lack of reliable data, decentralized supervision by inexperienced local authorities, and regulatory inertia. - Only a few SACCOs participate in the CIB despite customer borrowing across BFIs and SACCOs, sometimes using loans from one license type to repay another. - The 2014 FSAP recommended improved oversight, including a shared supervisory framework between NRB and the DoC. Consideration to supervise the 15 largest cooperatives is no longer being pursued. There is legal ambiguity on whether NRB has authority to regulate SACCOs. - NRB supervises the National Cooperative Bank, an NBFI providing services to SACCO customers under a supervisory regime still being developed. *Source: IMF | Technical Report – Nepal Financial Sector Stability Review (selected sections).* ### 119. Interviews with SACCOs revealed strong interest in being supervised by NRB or ### 1nplea2023003 - 119. Interviews with SACCOs revealed strong interest in being supervised by NRB or ### SACCOs: baseline findings - SACCOs expressed strong interest in being supervised by NRB or other competent authority, believing better oversight would enhance professionalism, trust, and viability of the sector. - Some SACCOs have undertaken self-regulatory efforts to strengthen risk management, governance, and controls. - A new regulatory reporting system is gaining traction, with around 50 percent of SACCOs currently onboarded. ### SACCOs: main recommendations - NRB should work with the MoLCP to develop a coordinated supervision program for SACCOs with cooperative authorities, with the goal of minimizing risks to the financial sector. - NRB’s role should be targeted to the largest and/or systemically important SACCOs. - Technical assistance (TA) is recommended for development of the new regime, following global good practices. - NRB is exploring support for a second-tier cooperative to be created that would assist with supervising systemically important SACCOs. - Data sharing arrangements for SACCOs should be formalized with cooperative authorities under a written agreement to ensure a timely flow of information. - Monitoring activities should be complemented by regular engagement between authorities to discuss sectoral risks and trends. - NRB plans to work on formalizing data sharing with relevant cooperative authorities. --- ### Microfinance Institutions (MFIs): baseline diagnostics - MFIs provide important financial services for low-income and rural customers in Nepal, especially women. - MFIs operate under a tiered (Class D) bank license with more limited permissible activities. - Four MFIs offer wholesale services to other MFIs, and two take public deposits (i.e., other than from members) on a restricted basis. - MFIs mostly offer unsecured group loans for female borrowers who lack collateral. - Many MFIs are digitalizing product lines and offer complementary services such as money transfers and insurance through partnerships with other FSPs. - The microfinance sector has 64 providers and is considered larger than it should be by both NRB and the MFIs, leading to unhealthy competition and impacts on viability. - NRB is encouraging orderly consolidation within the sector and not issuing new licenses. - MFIs are supervised similarly to Class A, B, and C banks, including onsite and offsite monitoring and prudential norms. - MFIs report NPLs under 5 percent in most cases, with two problematic institutions subject to PCA. - Staff conducting MFI inspections lack expertise in the microfinance business model, due in part to frequent rotations of NRB staff. - Uniform, compliance-based procedures are applied to all institutions regardless of complexity and size. - Lending rates are capped at 15 percent, and service charges at 1.5 percent. - Funding comes mainly from investments and borrowings from other BFIs (including directed lending required by NRB) and voluntary savings from members. - Some MFIs face negative interest margins where they lend at 15 percent while borrowing at 17 or 18 percent, which is unsustainable. - NRB is considering allowing MFIs to set their own rates using a base rate plus premium framework similar to BFIs. - MFIs face competing expectations to operate as sustainable (i.e., profitable) banks while being viewed as charitable endeavors; a clearer vision and strategy is needed. ### MFIs: main recommendations - NRB should replace the MFI interest rate ceiling with a base rate plus premium. - The new regime should be complemented by: - Basic disclosure of key terms and conditions. - Clear definitions for microcredit (e.g., loan size, purpose). - Market surveillance to ensure rates stay transparent and affordable. - NRB is working on publishing a base rate and will review the need for the interest rate ceiling. - MFI inspections should follow proportionate, risk-based procedures to better allocate staff resources and capture risks. - Inspections should ensure participation by at least one microfinance subject matter expert, with training extended to others, as resources permit. - NRB should consider articulating its vision and goals for the microfinance sector in a formal policy, including MFIs and other relevant stakeholders in this effort. --- ### Credit information and preventing over-indebtedness: baseline diagnostics - The CIB provides a basic platform to exchange credit information for 137 banks and financial institutions. - The CIB is owned by BFIs (90 percent) and NRB (10 percent) and is chaired by a member of NRB’s management team. - Information reported is mostly negative; efforts are underway to incorporate alternative information (e.g., utility bills) and create a psychometric credit score. - All BFIs that extend credit must participate in the CIB. - MFIs provide and access credit information on a separate platform from other banks, and only a few wholesale SACCOs participate, undermining the system’s effectiveness by precluding a comprehensive view of a customer’s credit history. - CIB plans to merge the databases of MFIs and banks so users can pull a single credit report for individual borrowers. - A public blacklist is available on the CIB website containing names of individuals who have defaulted on a loan or bounced a check. - The public blacklist contains thousands of names dating back decades and is available to anyone to use for any purpose. - Public disclosure of the blacklist is an unwarranted intrusion on customer privacy and may deter the unbanked from seeking formal services. ### Credit information: main recommendations - MFI and bank credit information should be combined on the CIB platform and incorporate SACCO data; this can be done gradually as systems and data quality allow. - The CIB should remove public access to the blacklist on its website. - NRB should review its privacy rules to ensure they adequately protect customer privacy in financial services. --- ### Digital payments and remittances: baseline diagnostics - Digital payments are an increasingly important access point for financial inclusion. - There are 27 non-bank PSP, although only a handful are active. - Four companies are the main providers of e-wallets, with the largest reporting market share of 56 percent. - There are around 13,000 agents to provide cash in/cash out and other transactions. - QR code payments were introduced in 2021. - Use of debit cards and mobile banking is common; credit card use is rare. Ecommerce is in early stages of development. - QR payments have been popular, but e-money usage has room to grow as a large proportion of accounts are inactive. - Many customers open accounts to receive a bonus or premium, and a persistent preference for cash remains. - Larger wallet providers are incorporating other useful services to increase activity and customer loyalty. - Inward remittances reached $7.6 billion in the year ending July 2022, mainly from the United States, Qatar, Saudi Arabia, India, and the United Arab Emirates. - Migrant workers can use traditional money transmitters, banks, PSPs, and informal hundis to send and receive funds. - Remittances are frequently converted to cash, though some FSPs offer incentives to link funds to an e-wallet or bank account. - NRB has implemented incentives to help encourage formalization of remittances. --- ### Financial Consumer Protection (FCP): baseline diagnostics - FCP is critical for transparency, fair treatment, data protection and privacy, and dispute resolution, contributing to confidence and trust in financial services. - NRB has a newly formed Financial Inclusion and Consumer Protection Division staffed with six people, three of which are assigned to FCP. - To date, FCP functions have been limited to responding to grievances and financial literacy activities. - The dedicated division will need the full array of legal, regulatory, and supervisory resources along with training and capacity building. - NRB can apply a building block approach and prioritize activities over time beginning with areas of greatest risk and potential impact. ### FCP: main recommendations - NRB should develop a comprehensive FCP function, including: - Draft a dedicated FCP law and subordinate regulations. - Develop tools and resources to supervise FCP, including manuals, policies, training, onsite inspection procedures, offsite monitoring tools, and enforcement standards. - TA would be desirable to assist NRB in applying global good practices in line with Nepal’s country context. --- ### Technical Assistance Roadmap (TARM) — summary - A TA Roadmap (TARM) was developed in cooperation with the authorities and in consultation with IMF departments. - The mission developed a comprehensive list of TA recommendations in six topical areas, with reforms to be conducted with close involvement and coordination among relevant competent authorities. - Authorities’ comments on the TARM were largely addressed; additional information and adjustments to completion timeframes and TA needs were made where appropriate. - Sequencing of TA under each workstream should be addressed in follow-up TA, subject to approval by the Financial Sector Stability Fund and further discussions between authorities and IMF staff. - The mission maintains recommendations for TA needs for banking supervision and regulation, stress testing, crisis management, and financial inclusion to enhance capacity in financial sector oversight. - Authorities should ensure close alignment between the FSSR recommendations and measures on improving financial sector regulation and supervision under the ECF, including prioritization and timelines. - Continuing efforts to improve asset quality and banking supervision, consistent with proposed structural benchmarks under the ECF program, should warrant the highest priority from authorities. *IMF | Technical Report – Nepal Financial Sector Stability Review* ### 144. The TARM proposes TA to build capacity in the authorities to address risks and ### The TARM proposes TA to build capacity in the authorities to address risks and vulnerabilities in the financial system ### Overview of the TARM - Purpose: Build capacity in the authorities to address risks and vulnerabilities in the financial system over the next three years. - Deliverable: A prioritized set of actions presented in one integrated table that links: Key Vulnerability; Recommendation; TA Activity (“needed”, “not needed”, “in progress”, “planned”); Responsible Agency; Priority (high, medium, low); Timeframe (ST, MT, LT). - Grouping: TA Activities are grouped by topical areas with several individual activities in each group. ### Banking supervision and regulation (Section II.A) - Key vulnerability: A lack of forward-looking analysis to identify early emerging risks. - Recommendation: Develop analytical tools to produce reports for offsite surveillance. - TA Activity: Needed - Responsible Agency: NRB - Priority: High - Completion Timeframe: ST - Key vulnerability: Structured succession planning and risk specialism for supervision. - Recommendation: Enhance training programs to strengthen supervisory skills and build risk specialists in banking supervision. - TA Activity: Not needed - Responsible Agency: NRB - Priority: High - Completion Timeframe: ST - Key vulnerability: A build-up of credit risks. - Recommendation: Undertake a comprehensive review of credit risk supervision practices and processes targeting (i) connected lending, (ii) group exposures and (iii) risk concentrations. - TA Activity: Needed - Responsible Agency: NRB - Priority: High - Completion Timeframe: MT - Key vulnerability: Liquidity and funding stress cause a disruption. - Recommendation: Undertake an assessment of liquidity regulations and supervisory processes targeting: (I) development of funding plans; (ii) a quantitative impact study for the LCR; and (iii) longer-term plans to diversify bank sources of funding. - TA Activity: Needed - Responsible Agency: NRB - Priority: High - Completion Timeframe: MT - Key vulnerability: Robustness of capital buffers to absorb losses and resilience during stress. - Recommendation: Undertake a comprehensive review of the capital management framework including: (i) definition of capital; (ii) calculation of RWAs; (iii) SREP processes; (iv) Pillar 2; and (v) the buffer framework. - TA Activity: Needed - Responsible Agency: NRB - Priority: High - Completion Timeframe: MT - Key vulnerability: Problem assets and loan loss provisioning. - Recommendation: Undertake a comprehensive review of the regulations and supervisory processes for problem loans and loan loss provisioning with a focus on loan classifications and the transition to IFRS; exit of special measures related to COVID-19; and collateral valuation guidance. - TA Activity: Needed - Responsible Agency: NRB - Priority: High - Completion Timeframe: MT - Key vulnerability: Absence of a consolidated supervision framework constrains the exercise of powers. - Recommendation: Develop a comprehensive consolidated supervision framework that enables effective group supervision. - TA Activity: Needed - Responsible Agency: NRB - Priority: Medium - Completion Timeframe: LT - Key vulnerability: Inadequate business continuity and DR planning for larger systemic banks. - Recommendation: Assess the regulations for BCP and DR. - TA Activity: Not needed - Responsible Agency: NRB - Priority: Medium - Completion Timeframe: MT - Key vulnerability: Vulnerability to climate-related financial risks. - Recommendation: Integrate climate-related financial risks into supervision processes and risk management activities such as bank stress testing. - TA Activity: Needed - Responsible Agency: NRB - Priority: Medium - Completion Timeframe: LT - Key vulnerability: Directed lending causes distortions. - Recommendation: Consider alternative programs and instruments to achieve goals associated with existing directed lending programs. - TA Activity: Not needed - Responsible Agency: NRB - Priority: High - Completion Timeframe: ST ### Stress testing (Section II.B) - Key vulnerability: Overly simplified micro solvency stress tests based on single factor sensitivity analyses. - Recommendation: Revamp the micro stress tests of solvency by using a smaller set of comprehensive scenarios and relying on more realistic calculations and projections over an explicit 1-year horizon. - TA Activity: Needed - Responsible Agency: NRB - Priority: High - Completion Timeframe: MT - Key vulnerability: Limited granularity of funding shocks and lack of stress in the value of liquid assets in micro liquidity stress tests. - Recommendation: Improve micro stress tests of liquidity by introducing a richer funding shock structure, imposing haircuts on government securities, and making the horizon of liquidity distress more explicit. - TA Activity: Not needed - Responsible Agency: NRB - Priority: Medium - Completion Timeframe: MT - Key vulnerability: Micro-finance institutions not included in micro stress testing. - Recommendation: After revisions, extend the solvency and liquidity stress testing to include micro-finance institutions on a proportionate basis, with selected simplifications. - TA Activity: Not needed - Responsible Agency: NRB - Priority: Medium - Completion Timeframe: MT - Key vulnerability: Lack of use of micro stress test results in risk-based supervision. - Recommendation: Use micro stress test results, especially of solvency, to calibrate additional Pillar 2 capital buffers. - TA Activity: Not needed - Responsible Agency: NRB - Priority: Medium - Completion Timeframe: MT - Key vulnerability: Limited development of banks’ own stress testing. - Recommendation: Encourage banks to develop their own stress test scenarios leveraging upon the expected introduction of IFRS/NFRS 9. - TA Activity: Not needed - Responsible Agency: NRB - Priority: Medium - Completion Timeframe: LT - Key vulnerability: Non-existent top-down macro stress tests of solvency. - Recommendation: Develop macro stress tests of solvency of all supervised institutions (ABC and D class) based on explicit macroeconomic scenarios, credit risk satellite model(s), and consistent projection of banks’ balance sheets and P&L items over a 3-year horizon. - TA Activity: Needed - Responsible Agency: NRB - Priority: High - Completion Timeframe: MT - Key vulnerability: No contagion and interconnectedness analyses performed. - Recommendation: Complement macro stress tests with a contagion block to test domino-like sequences of institutions’ failures due to interconnectedness. - TA Activity: Needed - Responsible Agency: NRB - Priority: Medium - Completion Timeframe: MT - Key vulnerability: No macro stress tests of liquidity. - Recommendation: Develop top-down liquidity stress tests after the introduction of the LCR. - TA Activity: Needed - Responsible Agency: NRB - Priority: Low - Completion Timeframe: LT - Key vulnerability: Lack of regular macro-financial surveillance. - Recommendation: Strengthen the role, staffing and capacity of the existing financial stability unit to support developing a full-fledged regular systemic risk monitoring. - TA Activity: Not needed - Responsible Agency: NRB - Priority: High - Completion Timeframe: MT - Key vulnerability: Financial Stability Report is mostly descriptive. - Recommendation: Enhance analyses in the published Financial Stability Report, adopting a risk-oriented forward-looking approach based on newly developed macro stress tests and additional risk monitoring tools. - TA Activity: Needed - Responsible Agency: NRB - Priority: Medium - Completion Timeframe: LT ### Crisis management (Section II.C) - Key vulnerability: Current legal and operational framework is not conducive for a fast and efficient reimbursement of deposits. - Recommendation: Review the DCGF institutional setup and legal framework, including: (i) DCGF access to depositors' records at all times and prescribed formats (Single Costumer View files); (ii) DGF powers to assess and request corrections/improvements; (iii) use of DCGF resources for P&A. - TA Activity: Needed - Responsible Agency: DCGF - Priority: High - Completion Timeframe: ST - Key vulnerability: Current legal framework pertaining to bank resolution has significant gaps and inconsistencies. - Recommendation: Adopt a targeted review of the NRB Act to ensure consistency of resolution tools (resolution under special administration and liquidation) and consistency between relevant laws and regulations guiding bank resolutions. - TA Activity: Needed - Responsible Agency: NRB - Priority: Medium - Completion Timeframe: MT - Key vulnerability: Legal and regulatory framework for ELA has gaps which may expose the NRB to undue risks. - Recommendation: Review the NRB LOLR regulations and the applicable sections in the NRB Act. - TA Activity: Not Needed - Responsible Agency: NRB - Priority: High - Completion Timeframe: ST - Key vulnerability: Risk assessment framework is not sufficiently broad and forward looking. - Recommendation: NRB to strengthen frameworks and capacity for early detection of bank stress and early intervention actions with a more structured link between assessed bank risk and supervisory attention. - TA Activity: Needed - Responsible Agency: NRB - Priority: Medium - Completion Timeframe: MT - Key vulnerability: Lack of adequate operational plans/procedure manuals for implementation of resolution tools. - Recommendation: Strengthen resolution preparedness of the NBM for implementation of various resolution tools (including P&A and bridge bank) and prepare or improve operational plans. - TA Activity: Needed - Responsible Agency: NRB - Priority: High - Completion Timeframe: MT - Key vulnerability: Absence of crisis simulation exercises to test resolution preparedness and inter-agency cooperation. - Recommendation: Carry out resolution simulation exercises involving NRB, MOF, DCGF. - TA Activity: Needed - Responsible Agency: NRB, MOF, DCGF - Priority: Medium - Completion Timeframe: LT - Key vulnerability: Missing systemic crisis management framework and lack of contingency planning. - Recommendation: Provide a framework for improved interagency cooperation and input for country- and agency-wide contingency planning, specifying roles of relevant agencies. - TA Activity: Needed - Responsible Agency: NRB, MOF, DCGF - Priority: Medium - Completion Timeframe: LT ### Payment systems (Section II.D) - Key vulnerability: Legal certainty in finality and netting of payment and securities transactions is unclear. - Recommendation: Review the legal framework to address gaps including finality and irrevocability of transactions settled through payment systems, taking into consideration PFMI. - TA Activity: Not needed - Responsible Agency: NRB - Priority: High - Completion Timeframe: MT - Key vulnerability: Inadequate skilled resources in PSD; most experienced staff have less than 3 years of payment systems oversight experience. - Recommendation: Fill vacancies immediately; train staff; limit rotation of specialist staff; plan for succession. - TA Activity: Not needed - Responsible Agency: NRB - Priority: High - Completion Timeframe: MT - Key vulnerability: Key laws, regulations and directives are not published in a language commonly used in financial markets. - Recommendation: Provide English versions of key documents including PS Act, Bye-laws, design of RTGS system, security requirements. - TA Activity: Not needed - Responsible Agency: NRB - Priority: Medium - Completion Timeframe: MT - Key vulnerability: Inadequate separation of oversight and operator functions. - Recommendation: Re-organize PSD to deconflict oversight and operator roles; split functions at Director level minimum, recommended at ED or higher. - TA Activity: Not needed - Responsible Agency: NRB - Priority: High - Completion Timeframe: MT - Key vulnerability: Lack of formalized and documented working arrangements for RTGS among NRB departments. - Recommendation: Formalize and document internal arrangements for RTGS operations including reporting, role of internal audit, risk-management functions. - TA Activity: Not needed - Responsible Agency: NRB - Priority: High - Completion Timeframe: MT - Key vulnerability: NRB is a 10% shareholder and chairman of Nepal Clearing House Limited, creating potential conflict of interest. - Recommendation: Consider divesting shareholding and relinquishing chairmanship in NCHL and use oversight powers to influence policy outcomes. - TA Activity: Not needed - Responsible Agency: NRB - Priority: Medium - Completion Timeframe: MT - Key vulnerability: Systemically important payment systems have not been formally identified and designated. - Recommendation: Develop FMI designation framework and formally adopt PFMI through regulations or policy statements and apply PFMI to identified FMIs. - TA Activity: Needed (designation framework), Not specified for PFMI adoption - Responsible Agency: NRB - Priority: High (designation) / — (PFMI adoption) - Completion Timeframe: ST (designation) - Key vulnerability: No assessments of RTGS against PFMI and no public disclosure of compliance. - Recommendation: RTGS Operations Unit to conduct self-assessment against PFMI; Oversight Unit to conduct its own, review Operations’ assessment, require disclosure at least once every two years; ACH to conduct self-assessment and publicly disclose compliance where applicable. - TA Activity: (Implied needed) - Responsible Agency: NRB, ACH - Priority: — - Completion Timeframe: — - Key vulnerability: Lack of consideration for oversight cooperation with foreign regulators for multicurrency RTGS. - Recommendation: Establish whether cooperative oversight is needed and inform relevant authorities in line with Resp E KC2 for multi-currency RTGS; monitor and update changes. - TA Activity: Not needed - Responsible Agency: NRB - Priority: Low - Completion Timeframe: LT - Key vulnerability: Considerable interbank payments still settling via GL entries instead of RTGS. - Recommendation: Consider measures to increase RTGS participation and discourage GL entries, including mandating high-value checks be settled through RTGS. - TA Activity: Not needed - Responsible Agency: NRB - Priority: High - Completion Timeframe: LT - Key vulnerability: Intraday liquidity facility of RTGS system are cumbersome and underutilized. - Recommendation: Expedite dematerialization of government securities to facilitate full automation of intraday liquidity facility; work with PDMO to accelerate dematerialization and complete DOMS project; integrate/interface with DOMS to achieve delivery-vs-payment. - TA Activity: Not needed (some actions) - Responsible Agency: NRB/PDMO - Priority: High - Completion Timeframe: LT - Key vulnerability: Gaps in RTGS rules for settlement of foreign currencies. - Recommendation: Enhance RTGS Rules document and publicly describe design and operations of RTGS foreign currency settlement and any liquidity facilities. - TA Activity: Not needed - Responsible Agency: NRB - Priority: High - Completion Timeframe: ST - Key vulnerability: Cyber resilience and operational security gaps. - Recommendation: Expedite completion of cyber resilience guidelines aligned with CPMI-IOSCO Guidance on Cyber Resilience for FMI. - TA Activity: Needed - Responsible Agency: NRB - Priority: High - Completion Timeframe: ST - Key vulnerability: CISO lacks dedicated team; physical security weaknesses; lack of cyber and IT risk supervision capacity. - Recommendations: CISO to have a dedicated team; review physical security of systems infrastructure and remediate; hire or identify IT staff experienced in IT risk management and certified in IT Audit for supervision and training. - TA Activity: Mixed (some Not needed, some Needed) - Responsible Agency: NRB - Priority: High - Completion Timeframe: ST / MT / LT (as specified by individual items) - Key vulnerability: Lack of requirements to reduce wholesale payment fraud related to end-point security. - Recommendation: Review and adopt CPMI Wholesale Payment Fraud End-point Security elements; develop a security controls framework for RTGS participants modelled against SWIFT CSP. - TA Activity: Not needed - Responsible Agency: NRB - Priority: High - Completion Timeframe: MT - Key vulnerability: NRB does not have a BCM framework in place. - Recommendation: BCM and plan for RTGS should have a 2-hour RTO for critical systems; BC plans tested at least annually; implement an alternate non-similar system that can settle time-critical transactions where recovery in 2 hours is not possible. - TA Activity: Mixed (Not needed for BCM plan items; Needed for alternate non-similar system) - Responsible Agency: NRB - Priority: High - Completion Timeframe: MT / LT - Key vulnerability: Current licensing regime for payments is mostly limited to e-money and domestic money transfer, possibly constraining innovation. - Recommendation: Consider modernizing legislation/regulations to be more activity-based and risk-focused by conducting a cross-country comparative study. - TA Activity: Needed - Responsible Agency: NRB - Priority: Medium - Completion Timeframe: LT - Key vulnerability: Inadequate e-money float protection. - Recommendation: Review safeguards to protect float against insolvency of e-money issuer and ensure comprehensive measures (insurance, bank guarantees, trust account, undertakings by banks); diversify risks by allowing PSP to hold float in high quality liquid asset with multiple settlement banks. - TA Activity: — - Responsible Agency: NRB - Priority: — - Completion Timeframe: — ### Financial inclusion (Section II.E) - Key vulnerability: NRB’s hands-on approach to FSP product and strategic decisions constrains innovation and diversification. - Recommendation: NRB should evaluate where it could revise requirements for branching and lending to permit more demand-driven, market-friendly approaches by FSPs. - TA Activity: Not needed - Responsible Agency: NRB - Priority: Medium - Completion Timeframe: MT - Key vulnerability: Data gaps hinder informed policy decisions. - Recommendation: NRB should enhance data collection efforts for MSME credit (demand side) and gender disaggregated data and work with MFIs to include their information in the Financial Inclusion Dashboard. - TA Activity: Not needed - Responsible Agency: NRB - Priority: Medium - Completion Timeframe: MT - Key vulnerability: Failure to monitor and supervise large SACCOs exposes the financial sector to risks. - Recommendation: NRB should work with the MoLCP to develop a coordinated supervision program for SACCOs with cooperative authorities to minimize risks to the wider financial sector. - TA Activity: Needed - Responsible Agency: NRB, MOF, MoLCP - Priority: High - Completion Timeframe: MT - Key vulnerability: Ineffective information sharing precludes monitoring of SACCO risks. - Recommendation: Formalize data sharing arrangements for SACCOs with cooperative authorities under a written agreement to ensure timely flow of information. - TA Activity: Not needed - Responsible Agency: NRB, MOF, MoLCP - Priority: High - Completion Timeframe: MT - Key vulnerability: MFI interest rate ceiling undermines sustainability. - Recommendation: NRB should replace the MFI interest rate ceiling with a base rate plus premium. - TA Activity: Not needed - Responsible Agency: NRB - Priority: High - Completion Timeframe: ST - Key vulnerability: Uniform compliance approach and lack of staff with microfinance expertise weakens MFI supervision. - Recommendation: MFI inspections should follow proportionate, risk-based procedures. - TA Activity: Not needed - Responsible Agency: NRB - Priority: Medium - Completion Timeframe: MT - Key vulnerability: Lack of clearly articulated vision for the MFI sector. - Recommendation: NRB should consider articulating its vision and goals for the microfinance sector in a formal policy. - TA Activity: Not needed - Responsible Agency: NRB - Priority: Low - Completion Timeframe: LT - Key vulnerability: Lack of integrated credit information across providers limits CIB users’ ability to assess credit risk and over-indebtedness. - Recommendation: MFI and bank credit information should be combined on the CIB platform and incorporate SACCO data. - TA Activity: Not needed - Responsible Agency: NRB, CIB - Priority: Medium - Completion Timeframe: MT - Key vulnerability: Public access to blacklist on CIB website creates consumer risks and invades privacy. - Recommendation: The CIB should remove public access to the blacklist on its website. - TA Activity: Not needed - Responsible Agency: NRB, CIB - Priority: Medium - Completion Timeframe: ST - Key vulnerability: Lack of FCP regime exposes consumers to risk. - Recommendation: NRB should develop a robust FCP function, including: Dedicated FCP law and subordinate regulations; Tools and resources to supervise FCP. - TA Activity: Needed - Responsible Agency: NRB - Priority: Medium - Completion Timeframe: LT ### Timeframe definitions (as provided) - ST, short-term, less than six months. - MT, medium-term, with results around 18 months. - LT, long-term, with results around 30 months. *IMF | Technical Report – Nepal Financial Sector Stability Review* ### Annex I. Assessment of Financial Sector Statistics ### Annex I. Assessment of Financial Sector Statistics ### A. Financial Soundness Indicators (FSIs) - Nepal regularly reports FSIs to the IMF’s STA. The NRB reports and disseminates 13 core and 7 additional FSIs for DTs, two additional FSIs for OFCs, a FSI pertaining to HHs and two FSIs related to real estate markets. FSIs are compiled quarterly and reported to STA for dissemination. - Definitions and framework: - FSI definitions appear in line with IMF guidelines and the 2019 FSIs Compilation Guide (2019 FSIs Guide). - NRB has adopted core Basel principles, formalized a new Capital Adequacy Framework in 2015, and adopted the provisions of Basel III for commercial banks. - National standards (NFRS) are developed by the Accounting Standards Board (ASB), based on IFRS. - Consolidation basis: - NRB compiles FSIs on a Domestic Location (DL) Basis. The 2019 FSIs Guide recommends CBCSDI, but DL is acceptable where resident DTs have no material nonresident branches/subsidiaries. - No bank in Nepal has a foreign subsidiary or branch; some banks have resident subsidiaries in DTs and OFCs. NRB does not collect group-consolidated data for DTs with subsidiaries. - Implementation and expansion: - NRB was expected to start implementing the 2019 FSIs Guide by December 2022, adopting new reporting forms and metadata templates and expanding FSIs for OFCs. - A 2021 FSI TA mission assisted authorities to prepare to submit an expanded set of FSIs for OFCs. Key reported FSI values (2021Q2–2022Q2) - Core FSIs for Deposit Takers: - Regulatory capital to risk-weighted assets: 14.2, 13.4, 13.3, 13.5, 13.5 - Tier 1 capital to risk-weighted assets: 10.9, 10.4, 10.4, 10.6, 10.7 - Nonperforming loans net of provisions to capital: 2.6, 2.2, 2.1, 2.7, 2.3 - Tier 1 capital to assets: 9.0, 9.0, 9.0, 9.0, 9.2 - Nonperforming loans to total gross loans: 1.4, 1.2, 1.2, 1.3, 1.2 - Provisions to nonperforming loans: 68.0, 70.6, 71.4, 66.8, 68.3 - Return on assets: 1.9, 1.6, 1.6, 1.6, 1.8 - Return on equity: 12.5, 11.0, 11.3, 11.1, 12.7 - Interest margin to gross income: 71.0, 67.9, 70.5, 72.6, 75.9 - Noninterest expenses to gross income: 44.1, 46.4, 46.5, 46.6, 46.4 - Liquid assets to total assets: 22.2, 19.6, 18.7, 19.2, 22.1 - Liquid assets to short-term liabilities: 32.5, 29.7, 25.5, 26.7, 43.6 - Net open position in foreign exchange to capital: 0.2, 0.9, 0.7, 0.4, 0.5 - Additional FSIs for Deposit Takers: - Personnel expenses to noninterest expenses: 61.2, 64.3, 62.1, 60.5, 59.9 - Spread between highest and lowest interbank rates (base points): 115.0, 7.0, 24.0, 50.0, 5.0 - Customer deposits to total (non-interbank) loans: 93.3, 87.9, 87.3, 87.1, 91.3 - Foreign-currency-denominated loans to total loans: 3.8, 3.7, 2.5, 1.1, 1.0 - Foreign-currency-denominated liabilities to total liabilities: 3.4, 3.7, 2.8, 3.1, 3.4 - Additional FSIs for Other Financial Corporations (OFCs): - OFCs' assets to total financial system assets: total OFCs: 17.9, 17.8, 17.6, 17.6, 18.2 - OFCs' assets to gross domestic product: OFCs: 28.4, 29.0, 29.3, 27.3, 28.1 - Real estate markets: - Residential real estate loans to total gross loans: 7.6, 7.4, 7.8, 7.6, 7.8 - Commercial real estate loans to total gross loans: 3.1, 3.1, 3.1, 3.1, 3.4 - Households: - Household debt to gross domestic product: 26.2, 27.5, 28.8, 27.0, 26.35 ### B. Monetary and Financial Statistics (MFS) - Current reporting and SRFs: - NRB reports monthly monetary statistics using SRFs: 1SR for the central bank and 2SR for ODCs (commercial banks, development banks, finance companies that accept deposits). These are broadly in line with MFSMCG methodology for instrument classification, valuation, and sectoring. - Central bank survey, ODCs survey, and depository corporations survey are published monthly in IFS. - Coverage gaps and priorities: - SACCOs and MFIs that accept deposits together account for close to 10 percent of financial sector assets; NRB publishes supplemental balance sheet data for MFIs but does not include these in SRF-2SR reported to STA. - SACCOs provide annual balance sheet data to the Department of Cooperatives under MoLCP Alleviation, but lack of prescribed accounting standards and capacity issues hamper regular reporting. - Recommendations from a 2019 MFS TA mission included formalizing a data-sharing agreement between NRB, Department of Cooperatives, and NCBL to obtain aggregated SACCO balance sheet data; include MFIs in NRB reporting when they start reporting in NRB’s new system. - Other Financial Corporations (OFCs): - NRB does not yet report OFCs data to STA. OFCs (insurance companies, employees’ provident funds, mutual funds, merchant banks) represent around 12 percent of total financial system assets. - 2019 MFS TA found NRB lacked necessary balance sheet items to compile SRF 4SR for OFCs; simplified call report forms were issued to collect OFC data. - A TA mission scheduled in FY2023 will assist NRB to compile SRF 4SR and an OFC survey, map collected data to SRFs per MFSMCG, and start regular reporting to IMF for OFC survey dissemination in IFS. - Reporting SRF 4SR will enable compilation and dissemination of a consolidated financial corporation survey for central bank, ODCs, and OFCs. ### C. Balance Sheet Approach (BSA) - Data sources and construction: - Main data source for BSA matrix: SRFs, with additional inputs from the external sector (IIP) and government sector statistics (GFS). - SRFs enable from-whom-to-whom tables for stocks. IIP provides stocks of resident sectors vis-à-vis the rest of the world by instrument. GFS provides assets and liabilities of general government or subsectors by instrument and counterpart. - Nepal BSA for end-2021: - A BSA matrix for Nepal for end-2021 is provided in Table A.2, combining MFS and IIP data, presenting total assets and liabilities for all sectors by counterpart sector and by currency. - Nepal’s GFS data are not available for 2021. - Data limitations and required improvements: - MFS expansion (reporting OFC data via SRF 4SR and improving ODCs data) would substantially improve BSA completeness and usefulness. - IIP limitations: - NRB compiles and reports annual IIP based on BPM6, but lack of required breakdowns for BSA requires assumptions in the external sector part of the BSA matrix. - IIP does not provide separate external assets/liabilities for NFCs or HHs (these are combined with NPISHs in BPM6); the BSA assumes NFCs hold all external assets/liabilities of that combined sector. - Currency breakdown (domestic vs. foreign) is not available in IIP; BSA assumes external assets and liabilities of domestic sectors vis-à-vis external sector are all in foreign currency. - Recommended: NRB, in coordination with relevant agencies, should ensure consistency of IIP with 1SR, 2SR, GFS, and EDS; develop currency breakdowns and improve coverage of other investment and portfolio investment via improved data collection and a coordinated portfolio survey. - GFS limitations: - NRB submits annual GFS data including financial balance sheet and stock positions by counterpart, but data are presented at face value and difficult to reconcile with other macroeconomic datasets. - Recommended: fill institutional gaps in general government information, align stock positions valuation with GFSM 2014, and reconcile internally and with other macroeconomic datasets. - NFCs and HHs: - Remaining BSA data gaps after MFS, IIP, and GFS can often be filled with NFCs and HHs data, but collecting positions between NFCs and HHs is challenging and typically requires national accounts sources; issues include quality, coverage, periodicity, and timeliness. - BSA matrix numeric snapshot: - The Balance Sheet Approach Matrix is presented as "Nepal 2021 - Percent of GDP (120 Billions)". The matrix contains sectoral percent-of-GDP entries and currency breakdowns; users should refer to Table A.2 for the full matrix values contained in the source material. ### D. Financial Access Survey (FAS) - NRB has reported to FAS since 2009 and is a regular reporter for 2004–2021. - Indicators reported include number of commercial bank branches per 100,000 adults and number of ATMs per 100,000 adults (UN SDG Target 8.10), and since 2019 mobile and internet banking and mobile money indicators. - Nepal does not yet report gender-disaggregated data on use of financial services. The FSSR mission found some gender data available with authorities and recommends NRB coordinate with IMF to start reporting this data. ### Annex II. Assessment of TA Needs in Financial Sector Statistics - General: - NRB recognizes statistical coverage is essential for surveillance and is focused on closing important MFS data gaps. - NRB staff encouraged to attend regional and IMF HQ training courses on financial sector statistics (STA delivers MFS and FSI courses). - FSIs TA needs: - 2021 TA assisted NRB to compile select FSIs for OFCs and develop a workplan. The mission recommended reporting FSIs for OFCs starting December 2021, but authorities have not yet reported OFC FSIs. - Medium- to long-term TA may be needed to implement all recommendations of the 2019 FSIs Guide, including expanding FSIs for DTs and compiling FSIs for OFCs, NFCs, and HHs, and compiling concentration and distribution measures (CDMs). - Compiling FSIs for NFCs and HHs will require collaboration with Central Bureau of Statistics and Registrar of Companies to assess data adequacy and develop a road map to fill gaps. - MFS TA needs: - A TA mission for expanding MFS coverage to OFCs is planned for FY2023 to map collected OFC data to SRF 4SR per MFSMCG and review progress across OFC subsectors. - The TA mission will review progress on cooperation with the Department of Cooperatives to collect SACCO balance sheet data and provide a roadmap to include SACCOs in MFS. - The mission will identify MFIs that accept deposits and map them to SRF-2SR; future TA may be needed to include SACCOs in SRF-2SR reporting. *Source: Annex I. Assessment of Financial Sector Statistics — 1nplea2023003.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1nplea2023003.pdf_